Break-Even Points (Operating, Financial, Overall)

## Break-Even Points (BEP)

A Break-Even Point indicates a 'No Profit, No Loss' situation. In capital structure analysis there are three types:

### 1. Operating BEP — EBIT = 0

The sales level at which EBIT is zero (operating costs just covered).

$$\text{Operating BEP (Units)} = \frac{\text{Fixed Cost (FC)}}{\text{Contribution per unit}}$$

$$\text{Operating BEP (Value)} = \frac{\text{Fixed Cost (FC)}}{\text{P/V Ratio}}$$

### 2. Financial BEP — EPS = 0

The EBIT level at which EPS is zero. It equals the total fixed financial charges that EBIT must cover:

$$\text{Financial BEP} = \text{Interest} + \frac{\text{Preference Dividend}}{(1 - \text{Tax Rate})}$$

> Preference dividend is grossed up by dividing by (1−t) because it is paid post-tax, but EBIT is a pre-tax figure — so we convert PD into its equivalent pre-tax amount.

### 3. Overall BEP — EPS = 0 expressed in Sales

The sales level at which EPS is zero. It combines operating fixed cost with the fixed financial charges:

$$\text{Overall BEP (Units)} = \frac{\text{Operating FC} + \text{Interest} + \dfrac{\text{Pref. Dividend}}{(1-t)}}{\text{Contribution per unit}}$$

$$\text{Overall BEP (Value)} = \frac{\text{Operating FC} + \text{Interest} + \dfrac{\text{Pref. Dividend}}{(1-t)}}{\text{P/V Ratio}}$$

### Quick Comparison