Learning Materials For Accounting, Management , Finance And Economics.

Sunday, October 2, 2011

Concept Of Cash Break-Even Point

Break-Even Point tells about the volume of sales needed to cover all operating expenses. If sales equals to Break-even point then the company neither earns profit nor suffers from loss. If company can not achieve BEP, the company suffers from loss. If the company suffers from loss, does it mean that company faces with the difficulties in paying its monthly bills for rent, salary, suppliers and labors? Not necessarily, the issue can be resolved by computing cash Break-even point. Form that the BEP formula can be taken on basis.

BEP in units = Fixed costs/Selling price per unit- variable costs per unit.

Fixed costs include certain non-cash expenses like depreciation and amortization of expenses, for which no cash is needed in short-run. Therefore, company can exclude depreciation and other non-cash expenses in the short-run. If only the cash costs are included in fixed costs we get cash BEP.

Cash BEP= Fixed costs- Non-cash expenses/Selling price per unit - variable cost per unit.