The Break - even point
The Break-even analysis, better known as Break-even Analysis, is a technique that
relates total revenues and total costs (which include fixed and variable costs 39),
determining profitability according to different production levels. The breakeven point
(BEP) is nothing more than the minimum volume of sales that the company should
achieve to equal costs and turnover and to ensure coverage of all charges; The
calculation is rather simple in the case of a single-product company, while it becomes
more complex when it is aimed at multi-product companies.
The analysis of the break-even point is simple to elaborate and is the main tool with
which to evaluate the feasibility of the project in terms of recovery from the initial
overdraft in a reasonable time. However, it has a series of limitations ranging from the
presumption that the quantity demanded is fixed, or rather inelastic, to the failure to
take into account inventories (it is assumed that the initial inventories of the year are
equal to the final ones), from the clear distinction between costs fixed and variable
costs, not always so clear-cut and feasible in the company reality, to the static nature
of the analysis (the invariance of variable costs and market prices).