Explain the Concept: Break-Even Point in Accounting Fundamentals

In the previous segment, you saw how the operations in January translated into the financial statements of the pizza food truck business.

Do you think the pizza food truck must continue its operations? Well, a business can continue to operate only if it is able to cover all its expenses. But how do you know whether you are selling enough to cover all the expenses?

The ‘break-even point' is a financial tool that helps in determining the number of units to be sold in order to cover all expenses. Let’s see how to calculate the break-even point for the pizza food truck business.

In this video, you learnt that the break-even point is the point where the revenue is equal to the total cost. In this exercise, it represents the minimum number of pizzas that needs to be sold in order to generate profits. 

You also saw that cost can be of two types:

You learnt the formula to calculate the break-even point for a business:

• $Breakevenpoint=\frac{Fixedcost}{Variablemargin}$

  • Variable margin = Selling price - Variable cost

In the next segment, you will see how different activities in the month of February impact the three financial statements.