In case of football match if both teams after playing the full game scores 2 goals each than the result of the game is a draw that is neither team wins or lose the match and this drawn match is similar to breakeven point. Dictionary meaning of breakeven is that position where one makes neither profit nor loss and in case of accountancy breakeven point refers to that point or production volume where the total costs of the company is equal to total sales revenue of the company resulting in no loss no profit for the company, in order to understand more about this concept one should look at the various features of breakeven point-
Characteristics of Break Even Point
Mid-Point
The first and foremost characteristic of breakeven point is that it is the mid-point or reflection point because the moment company crosses its breakeven point on the upside it will start earning profits and moment it goes below this point it will start making losses and that is the reason why company at all costs should do sales at least equal to its breakeven point if it wants to survive in the competitive market.
Costs are Divided into Fixed and Variables costs
In case of breakeven point total costs of the company are divided into fixed and variable costs, fixed costs are those costs which happen whether the company produces the products or not and variable costs are those costs which happen only when company do production and breakeven point is that point at which the company is doing enough sales to recover a portion of variable cost and all fixed costs.
Fixed Cost Remain Constant
In the case of break-even point, it is assumed that fixed costs of the company remain unchanged which in real life may not hold true. Hence for example, if fixed costs of the company are $50000 and sales price per unit of the company is $10 and variable cost per unit is $5 then break-even point will be 10000 units, however, if fixed costs changes to $100000 than break-even point will change to 20000 units. Hence due to an increase of $50000 in fixed costs the company has to produce 10000 units more in order to achieve breakeven.
Shows Profit and Loss at Various Output Levels
One can find profit as well as the loss at various output levels which will help the company in knowing the financial position at various output levels. Hence in the above example if a company produces 20000 units than its profit will be 20000*$5 – $50000 = $50000 and at 30000 units its profit will be $100000, similarly if the company sells 5000 units than its loss will be 5000 units *$5 – $50000= $25000 and so on.
Helpful in Analysis
It can be a very helpful tool in the hands of the management because it can be used by management to see the impact of management decisions on the profit and loss of the company at various output levels. Hence for example, if the company decides to set up a new plant for increasing production than company through breakeven analysis can find out the minimum production needed by the new plant in order to achieve a breakeven point.
As one can see from the above characteristics of the breakeven point that it is a very important concept of accountancy as far as the manufacturing company is concerned and that is the reason why every accounting student should keep this concept in mind.