In the business world, the term break even point (BEP) is known for accounting purposes. Do you know how to calculate the correct BEP?
BEP plays an important role in making business decisions, both related to determining production to company profits.
Therefore, this calculation is very important to make the right decisions regarding the business steps to be carried out.
In addition, BEP also provides great functions and benefits for the sustainability of a business.
For that, you should start to understand what BEP is and the components included in it.
Check out the following Definition, Functions, and How to Calculate Break Even Point, let’s go!
What is the Break-Even Point?
BEP stands for break-even point, which is the point where the income earned is the same as the capital spent.
Simply put, the total profit and loss is at zero, which means that the company does not gain or lose.
This can happen when the company in its operations uses fixed costs and its sales volume is only sufficient to cover fixed costs as well as variable costs.
If the sales proceeds are only enough to cover variable costs and part of the fixed costs, then the company incurs a loss.
Conversely, if sales exceed variable costs and fixed costs, the company is in profit.
Apart from being important for companies, the calculation of BEP is also often used in stock investing to analyze when to buy and sell shares.
Break Even Point Functions
Break-even point plays an important function in business activities, especially for companies in evaluating the condition of the company and determining decisions for the future.
Here’s the break even point function:
- Determination of the minimum number of sales that must be maintained and immediately made so that the company does not lose money
- Determining the number of sales that must be achieved to make a profit in accordance with the plans that have been made, including determining the level of production
- To measure and maintain the level of sales and production not less than the BEP
- Sales planning and production levels
Benefits of Break Even Points
By calculating BEP, as a business person, you will get very broad benefits to support your business activities.
Here are the benefits of break even point:
- Know the minimum number of sales to maintain so as not to lose money
- Know the number of sales that must be achieved to make a profit
- Know how many sales to reduce to avoid losses
- Knowing changes in selling prices, costs, and sales volume
- Determine the product mix needed to achieve the targeted profit level
- Get information and instructions in solving problems at hand, such as adding or replacing production facilities
- Obtain information for consideration in making decisions regarding whether to close the business or not and when the company should stop operating
Break-Even Point Formula
In practicing how to calculate BEP, there are four components of break-even analysis that you should know first:
- Fixed costs are fixed costs even though the production volume changes
- Variable costs are costs that vary according to production volume
- Revenue is the profit or income received by the seller of goods
- Profit is the residual income after deducting fixed and variable costs
How to Calculate Break-Even Point
There are two ways to calculate BEP, namely using the unit formula and currency nominal.
Here’s the formula:
- BEP = Fixed Costs / (Price Per Unit / Variable Cost Per Unit)
- BEP = Fixed Costs / (Contribution Margin Per Unit / Price Per Unit)
Hopefully, this article is useful!