Break even point in accounting and finance
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Transcript of Break even point in accounting and finance
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Break-Even Point in Accounting and FinanceExplained
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What is BEP?
Point in time (or in number of units sold) when forecasted revenue exactly equals the estimated total costs; where loss ends and profit begins to accumulate. This is the point at which a business, product, or project becomes financially viable.
Revenue
Total Cost
BEP
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BEP in Accounting
• Break even point is defined as the level of sales at which profit is zero. The break-even point can also be defined as the point where total sales equals total expenses or as the point where total contribution margin equals total fixed expenses.
• Contribution Margin approach can be used to calculate Accounting BEP. Contribution Margin is the excess of unit sales price over unit variable cost
Contribution Margin = Sales price – Unit Variable cost
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BEP in Accounting
• BEP (in units) = Fixes Cost / Contribution Margin per
unit
• BEP (in amount) = Fixed Cost / Profit Volume Ratio• Where Profit Volume Ratio = Contribution margin per unit /
Selling price per unit
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BEP in Accounting
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Financial Break-Even
• Financial Break-Even Point is the level of EBIT which is equal to firm’s fixed financial costs, which includes Interest and Preference Dividend.
• The minimum level of EBIT required to pay off the commitments of interest, preference dividend and tax is Financial BEP. Anything beyond this point is profit to the shareholders.
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Financial Break-Even
• The Financial BEP can be determined by
Financial BEP = I + Dp / (1-t)• Where I = Annual interest charges Dp = Preference Dividend t = Tax Rate
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Accounting BEP vs Financial BEP
Accounting Financial
Caters Individual Needs
EPS
Investment Consideration
BEP in Units
BEP in Amount