break even point formula in cost accounting

Here is another example to consider Example 2 Zino company’s financial BEP = $80.5 million Net Interest expense = $20 million – $2 million = $18 millionīy obtaining the above figures, we can now proceed to calculate the financial break-even point, as followsįinancial breakeven (EBIT) = Preferred Dividends/ 1- tax rate + Net Interest expense See also Is Income Statement the Same as Profit and Loss? Preferred Dividends = 500 x 10% = $50 million To obtain the Financial BEP of the company, you will first calculate the preferred dividend payments, the earnings before taxes, preferred dividend payments, taxes, and interest expenses. The financial breakeven point for Zino Company will be what? The company incurs a total interest expense of $20 million, earning an interest income of $2 million-the tax rate at 20%. Zino has a $500 million preferred stock 10% per annum. Examples of Financial Break-Even Point Example 1 To obtain the exact financial break-even point formula, we would arrange the above equation, which will result toįinancial BEP = Preferred Dividend / 1 – tax rate + Interest Expenses. Making 0 the net income will therefore beĠ = EBIT x (1- Interest Expense) x (1- Tax Rate) – Preferred Dividends. Net Income = EBIT x (1- Interest Expense) x (1-Tax rate) – Preferred Dividends The relationship between the EBIT and the net income is stated as To realize the financial breakeven point, the EBIT is expected to result in a net income of zero. Here is where financial break-even comes in companies will need to understand how they are to generate enough profit after having covered their fixed financial expenses. See also Remittance Advice: Definition, Types, Advantages, and DisadvantagesĪ company will need to review its strategy if it earns anything less than the fixed expenditure it has to make.īased on priority scaling, companies usually pay out their interest on loans first, then preferred dividends to their preferred shareholders, and then finally make use of the remains for its equity shareholders and are retained early. Instruments like this come with mandatory payment, which makes up for the company’s fixed cost. Most companies with a mixed capital structure calculate their financial break-even point.Ĭompanies usually have various choices when raising funds, such as bank loans, debentures, preference, equity, etc. Financial break-even concerns itself with the ending section of a company’s income statement. It is also seen as the level that equates the company’s interest expenditure in addition to its associated taxes and the dividend paid to preferred shareholders.Īny earning learning from the company beyond this level is usually considered a profit to its shareholders. Put in another way, it could be seen as the level of EBIT which equates to a fixed financial cost for the company, such cost could be preference dividends, debt interest, and its likes. It is also considered the minimum EBIT (earnings before interest and tax) a company should earn to attain its fixed target. The financial breakeven point is the level of earning before Interest and taxes where the company’s earnings per share equate to zero that is, the company’s net income will equal zero. Here we would base more on financial breakeven. While accounting breakeven concerns the point at which a company is neither making a profit nor a loss, that is a position where the company’s revenue and expenditure equate.įinancial break-even differs in some ways. Financial breakeven differs from accounting breakeven. The term is used by accounting firms, investment institutes, and companies. Breakeven concerns itself with an entity’s margin of safety.

Break even point formula in cost accounting