When building a business, the goal is to ensure its long-term success. Various assessment elements are crucial in determining a company’s potential for long-term development. One of the key factors that must be understood to assess a company’s long-term viability is the break-even point (BEP) metric.
The BEP is a crucial benchmark for determining the profitability of a business. Calculating the BEP is essential for business owners to gain a comprehensive understanding of their operations. Before delving into the formula, it is important for business professionals to familiarize themselves with the definition of the break-even point.
What is the break-even point (BEP)?
break even point
The break-even point (BEP) refers to the point at which a company’s revenue and expenses are equal. It is the moment when the company neither makes a profit nor incurs a loss. In other words, the BEP represents the break-even moment or the point of return on investment, making it a vital aspect of business.
Determining the break-even point is crucial for future budget planning within the company. Several factors need to be considered when discussing the BEP, including production costs, employee recruitment, and potential profits.
Calculating the BEP is highly beneficial for business owners. It provides valuable information regarding the amount of investment required to offset initial expenses. Furthermore, the BEP calculation establishes a threshold to prevent the company from incurring losses. The results of the calculation can also be utilized for stock trading analysis and budget analysis for various company projects.
Also read: What is Revenue Stream and Its Importance for Startup
Components Calculated in BEP
The calculation of the BEP, or break-even point, requires careful consideration of several components to ensure accurate results. Here are the components that need to be calculated to determine the BEP:
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Fixed cost
This component represents the fixed expenses that are incurred whether the company is actively producing or not.
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Selling price
It is essential to calculate the selling price per unit of the goods or services produced. This component encompasses not only the cost of goods but also the cost of services.
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Revenue
The revenue or income generated from selling the goods or services needs to be calculated.
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Variable cost
This component is unique because variable costs fluctuate depending on the volume of production. Increased production leads to higher variable costs, while decreased production results in lower variable costs.
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Profit
Profit can be calculated by deducting the overall fixed and variable costs from the total revenue.
By accurately calculating these components, a comprehensive understanding of the break-even point can be achieved, enabling better financial decision-making within the company.
Also read: Gross Merchandise Value (GMV): Definition and How to Calculate It
BEP Formulas and How to Calculate It
Understanding all the necessary components makes calculating the BEP easier. In accounting, the BEP is used to determine the costs incurred by a company to produce goods or services that match the income earned within a specific period. To help with understanding, here are several BEP formulas and their calculations:
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BEP = Fixed cost / Contribution margin per unit
This formula is used when you know the number of units that need to be sold to cover production costs. It can also be multiplied directly by the cost per unit.
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BEP = Fixed cost / (Selling price per unit minus variable cost per unit)
This is the most basic BEP formula, used to determine the break-even point where the total production costs incurred are equal to the number of units sold. The difference between the selling price per unit and the variable cost per unit forms the contribution margin.
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Contribution margin = Total sales minus Variable cost
The contribution margin is used to measure the impact of sales on profits and determine the profitability of a product in the market. By considering the variable costs incurred, including total costs or sales, this margin helps separate production costs from profits, allowing companies to understand price intervals for their products or services.
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BEP in currency = Selling price per unit x BEP per unit
If you want to express the BEP results in a specific currency, such as the Rupiah, you can use this formula as an additional step. Multiply the selling price per unit by the BEP per unit to calculate the break-even point in the desired currency.
By utilizing these formulas, businesses can accurately calculate the break-even point and gain valuable insights into their financial performance and pricing strategies.
Also read: Understanding Business Model Canvas (BMC) and Its 9 Elements
Sample Question for Calculating BEP
break even point
Sepeda Tua Company has the following cost data and production plans:
- Monthly fixed cost: Rp100 million, comprising:
- Employee + owner salary: Rp40,000,000
- Health insurance: Rp10,000,000
- Office lease: Rp20,000,000
- Factory lease: Rp30,000,000
- Variable cost per unit: Rp100,000, consisting of:
- Raw materials: Rp55,000
- Direct labor: Rp20,000
- Other costs: Rp25,000
- Selling price per unit: Rp200,000
Here is how to calculate the BEP of Sepeda Tua Company: BEP unit = Fixed cost / (price per unit minus variable cost per unit) BEP unit = Rp100,000,000 / (Rp200,000 – Rp100,000) BEP unit = Rp100,000,000 / Rp100,000 BEP = 1,000 units
Therefore, the BEP for Sepeda Tua Company is 1,000 units based on the formula and calculations above.
Next, use the formula BEP Rupiah = Fixed cost / (contribution margin per unit price per unit) BEP Rupiah = Rp100,000,000 / (Rp100,000/Rp200,000) BEP Rupiah = Rp100,000,000 / 0.5 BEP = Rp200,000,000
Thus, it is found that the BEP for Sepeda Tua Company in Rupiah is Rp200,000,000.
Also read: What is Return On Investment (ROI), and How to Calculate It
Factors that Can Influence BEP
Understanding how to calculate the BEP helps determine the company’s target for covering production costs. However, although it has been estimated perfectly, the BEP can also increase or decrease depending on several factors. The following are the factors that can affect a company’s BEP:
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Production equipment maintenance
When building a business, it is essential to take care of the tools used to produce the goods sold. The maintenance of these tools is necessary for ensuring smooth production. However, such maintenance incurs additional costs, which can affect the increase in BEP.
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Rising production costs
Production costs tend to rise due to various factors that support this activity. One of the most significant factors is the cost of raw materials for the products. Over time, the cost of raw materials increases. Additionally, expenses such as building leases or employee salaries need to be considered.
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Increasing production
The BEP can also increase if there is an increase in market demand. When demand rises, the company needs to produce more goods to meet the demand. Consequently, the BEP will rise to cover the production costs associated with meeting the increased demand.
That is the definition of the BEP, or break-even point, its formula, and how to calculate it. As a business owner, it is crucial to understand the BEP to determine the future budget requirements of the company before initiating production. With a proper understanding of the BEP, your company can operate smoothly and experience rapid growth.
