Question

If selling price of a product is Rs 200, Variable cost per unit is Rs 120 and Fixed cost is Rs 300000, what is Break even point?

• A. 3750 units
• B. 1500 units
• C. 2500 units
• D. 3000 units

Answer 1

Answer:

A. 3750 units

Understanding the Break-Even Point (BEP) in Accounting

What is the Break-Even Point?

• The Break-Even Point (BEP) represents the sales volume at which a business's total revenues equal its total costs. At this point, the company makes neither a profit nor a loss.
• It is a crucial metric for businesses to understand their cost structure and to set sales targets.

Formula for Break-Even Point in Units

• The formula to calculate the Break-Even Point in units is:
  BEP (Units) = Fixed Costs / (Selling Price Per Unit - Variable Cost Per Unit)
• The denominator, (Selling Price Per Unit - Variable Cost Per Unit), is also known as the Contribution Margin Per Unit. This is the amount each unit sold contributes towards covering fixed costs and generating profit.

Applying the Formula to the Given Data

• Fixed Costs: Rs 300,000
• Selling Price Per Unit: Rs 200
• Variable Cost Per Unit: Rs 120

Calculation Steps:

1. Calculate the Contribution Margin Per Unit:
   Contribution Margin Per Unit = Selling Price Per Unit - Variable Cost Per Unit
   Contribution Margin Per Unit = Rs 200 - Rs 120 = Rs 80
2. Calculate the Break-Even Point in Units:
   BEP (Units) = Fixed Costs / Contribution Margin Per Unit
   BEP (Units) = Rs 300,000 / Rs 80
3. Result:
   BEP (Units) = 3750 units

Significance for Competitive Exams:

• Questions on break-even analysis are common in accounting and business-related competitive exams.
• Understanding the BEP formula and its components (fixed costs, variable costs, selling price, contribution margin) is essential for solving these problems.
• The BEP helps in determining the minimum sales required to avoid losses and also provides a baseline for profit planning.
• It's important to distinguish between BEP in units (as calculated here) and BEP in sales revenue. The latter is calculated as: BEP (Sales Revenue) = Fixed Costs / Contribution Margin Ratio, where Contribution Margin Ratio = (Contribution Margin Per Unit / Selling Price Per Unit).