Break-even Point Calculation

In break-even point calculation, the break-even point is, in general, the point at which gains equal losses. The point where sales or revenues equal expenses. Or also the point where total costs equal total revenues. There is no profit made or loss incurred at the break-even point. This is important for anyone that manages a business since the break-even point is the lower limit of profit when setting prices and determining margins.

Breaking even today does not return the losses occurred in the past, or build up a reserve for future losses, or provide a return on your investment (the reward for exposure to risk).

The Break-even method can be applied to a product, an investment, or the entire company's operations and is also used in the options world. In options, the break-even point is the market price that a stock must reach for option buyers to avoid a loss if they exercise. For a call, it is the strike price plus the premium paid. For a put, it is the strike price minus the premium paid.

The BEP must not be mistaken for the payback period, the time it takes to recover an investment.

In Value Based Management terms, a break-even point should be defined as the operating profit margin level at which the business / investment is earning exactly the minimum acceptable rate of return, that is, its total cost of capital.

Book: Marcell Schweitzer - Break-Even Analyses: Basic Model, Variants, Extensions

Compare with Break-even Point Analysis: : CFROI | Economic Value Added | Cost-Benefit Analysis | Free Cash Flow | Net Present Value

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