These days a great deal of importance is attached to cost-volume-profit relationship, which, as the name itself indicates, is an analysis of three distinct factors — cost, volume and profit. The study of cost-volume-profit relationship is frequently refered to as the Break-even Analysis. A break-even point  is that quantity of output at which the total sales revenue equals the total cost, assuming a certain selling price. As BEP represents a no-profit-no loss point, sales beyond BEP result in profits and the further the sales are from the BEP, the higher are the profit profits. Sales below the BEP represent losses to the marketers.

Determination of BEP: There is a company whose fixed overhead is constant at Rs. 6000. It produces and selles an out put of 25 tonnes. Its selling price is Rs. 600 per tonne and its variable costs are Rs. 200 per tonne. Thebreak-even point may be found using the following:

Break-even point ( In Quantity ) = Total Fixt Cost/ Unit Contribution to Overheads

=Total Fixed Costs/ Selling Price – Variable Costs

= 6000/ 600 -200

= 15

Here, the assumption is that fixed costs remain constant for a specified level of activity. The production may vary from zero to the full projected capacity and yet the fixed costs do not change. This is valid for a limited short period. The second assumption is that the variable costs vary directly and proportionately with the volume of production. Thus double the level of activity and the variable costs would be twice the previous one. Another break-even point will be found for another selling price. The break-even point is for Rs. 600 per tonne price only. Break-even point of 15 at a price Rs. 600 per tonne means that if the market buys less than this quantity,  the firm will be at a loss. The output produced and sold in our example is 25 and it is 10 units beyond the BEP.