How is the PV Ratio Used in Break-Even Analysis?

The PV Ratio is the fastest way to calculate a company's Break-Even Point (BEP) in terms of sales value (i.e., how much revenue you must earn to cover all costs).

Once you know your fixed costs and your PV Ratio, the formula is:

Break-Even Point (in Sales $) = Total Fixed Costs / PV Ratio

For example, if a company has $50,000 in fixed costs and its PV ratio is 40%, its break-even point is:

$50,000 / 0.40 = $125,000\

This means the company must earn $125,000 in sales just to cover its costs.

Finding Sales for a Target Profit

You can also use the PV Ratio to find the sales needed to achieve a specific profit:

Sales for Target Profit = (Fixed Costs + Target Profit) / PV Ratio