Break Even Point of a Company
A Break-Even point refers to a state where the company’s income and its total expenses reach the same value, thus creating a state where no loss or profit is possible to occur. In a business it is considered as a crucial point where the company may meet loss or can gain profit by various factors affecting the breakeven point.
A company’s breakeven point is dependent on three basic factors:
- Fixed expenditure
- Price of the products
- Variable expenditure
How to calculate breakeven point of a company?
It is derived from the above mentioned parameters. But it is mainly calculated under various assumptions like:
- The company will have to sell only certain products.
- The company will not meet any fluctuations.
- The company will sell only in some predetermined markets.
- The number of customers is the same.
But for practical cases these parameters will not be met. So breakeven point is calculated only through theoretical assumptions.
Breakeven point = (Fixed Expenditure / Price of the products) – Variable expenditure
In case if the economy is in recession, the sales might drop leading to loss for the company. But by knowing the breakeven point it can be managed by raising the price of the products or by cutting down the fixed and variable expenses.
