Hello, friends! Welcome to Motivational Banker.

Today, in today’s blog we are diving into an important concept from CAIIB’s Banking and Financial Management—the Break Even Point (BEP). Let’s get started without wasting a moment!

Feel free to watch the video to listen in Hindi or read the blog in English –

Understanding Break Even Point (BEP)

Imagine you run a company selling 2,000 units of a product. Each unit sells for ₹10. So, your total sales amount to ₹20,000.

However, making or buying the product costs ₹6 per unit. This is your variable cost, which totals ₹12,000 for 2,000 units. After covering variable costs, you’re left with ₹4 as your contribution per unit. Multiply this by 2,000 units, and your total contribution is ₹8,000.

From this contribution, you need to pay the company’s fixed costs (like rent), which amount to ₹6,000. Subtracting the fixed costs from the contribution leaves you with a profit of ₹2,000.

What is the Break Even Point?

The Break Even Point is the number of units you need to sell so that your profit is exactly ₹0—no profit, no loss. Essentially, it’s the point where total revenue equals total costs.

Here’s how you calculate it:

1. Formula for BEP (Units):BEP (Units) = Fixed Costs ÷ Contribution per Unit
   Substituting the values:
   BEP (Units) = ₹6,000 ÷ ₹4 = 1,500 units

   This means you need to sell 1,500 units to break even.

2. Formula for BEP (₹):BEP (₹) = BEP (Units) × Selling Price per Unit
   Substituting the values:
   BEP (₹) = 1,500 × ₹10 = ₹15,000

   So, you need to sell ₹15,000 worth of goods to break even.

Profit Volume Ratio (P/V Ratio)

To further understand BEP, let’s calculate the Profit Volume Ratio (P/V Ratio), which shows the contribution as a percentage of sales:

P/V Ratio = (Contribution ÷ Sales) × 100
Substituting the values:
P/V Ratio = (₹4 ÷ ₹10) × 100 = 40%

This means 40% of your sales revenue goes towards covering your fixed costs and profit.

Revisiting the Calculation

To verify:

• Selling 1,500 units at ₹10 per unit gives ₹15,000 in sales.
• Variable costs for 1,500 units are ₹9,000 (₹6 per unit).
• Contribution left: ₹6,000.
• Subtracting fixed costs (₹6,000) leaves ₹0 profit—this is the Break Even Point.

Why is BEP Important?

Understanding your BEP helps you plan better, make informed decisions, and ensure financial stability. It tells you exactly how much you need to sell to cover your costs.

I hope this quick breakdown has helped you understand the concept of Break Even Point!

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