Break-even point analysis
Jaromír Skorkovský
Department of corporate economy

Graphical representation
Costs
P x Q
F + VC = TC
VC
F

BEP- Basic Statements
•Break-Even Point is the amount of product at which total costs are equal to total returns. From
this point, the company or project begins to generate profit.
•The break-even point, in its classic form, tells you how much product to sell to generate profit.
It is a volume indicator.
•The break-even point in related currency thus basically means 0.
•In the next slides, we present a formula, where it is also possible to incorporate the required
rate of profit (in related currency) into the calculation.
•As a result, we will shift to the right along the X-axis (sales volume) in the graph and the
resulting Q (X pieces) will be higher than at the "classic" break-even point, where the profit is
zero.

Calculation I
•The basic calculation of the break-even point is not complicated. All you have to do is put
together the Price, Costs and possibly the Required profit.
•However, the challenge is to get to these aggregated variables. The data for partial calculations
are obtained utilizing financial analysis, using data from accounting. Good financial management
considers the break-even point analysis to be an absolute must. It is not just a “lesson from
microeconomics” or “theoretical exercise”

Calculation II
Profit = Price x Quantity of Sold Products  - Total Costs
Total Costs = F+VC x Q
Profit = P x Q  - F- VC x Q
If BEP then Profit=0
Profit = Q x (P-VC)   - F  = 0
Q= F/(P-VC)
VC- cost for one product unit
F= Fixed costs
VC=Variable costs
Q=Quantity
P=Price

Simple example
•What is the turning point in practice can be shown in a model example?
•Let's imagine that you want to start confectionery production. How do you know how many cakes you
have to sell to make a profit?
•
- Real capacity consideration
-  Price conditions analysis
-  List of all costs
-  Calculations and modeling
Let's assume that the total input costs (fixed costs) will be 250000 CZK.
Set the selling price of one cake = 750, - CZK
Variable costs for 1 cake = 300, - CZK
•CZK=Czech Crown
BEP = 555 cakes [calculation: 250000 / (750 – 300)].
Q= F/(P-VC)