What is the difference between break-even point and payback period?
Break-even point is the volume of sales or services that will result in no net income or net loss on a company's income statement. In other words, the break-even point focuses on the revenues needed to equal exactly all of the expenses on a single income statement prepared under the accrual method of accounting.
The break-even point in dollars of revenues can be calculated by dividing a company's total fixed expenses by its contribution margin ratio. The break-even calculation assumes that the selling prices, contribution margin ratio, and fixed expenses will not change.
Payback period is the number of years needed for a company to receive net cash inflows that aggregate to the amount of an initial cash investment. Hence the payback period focuses on the pertinent cash flows of multiple accounting years instead of the net income of a single accounting period. The payback period is often computed when evaluating potential capital expenditures. However, the payback period is considered to be flawed because it ignores 1) the cash flows occurring after the payback period, and 2) the time value of money.
AccountingCoach PRO contains a cost and managerial accounting exam with 520 questions (with answers) to learn or review topics such as break-even.