Since calculating the break-even point is very important for business organizations to make strategic decisions, it is important to know how the break-even point (BEP) is calculated. The purpose of this article is to explain different methods of calculating the BEP.
What is the break-even point (BEP)
The break-even point refers to the point at which the total costs correspond to the total sales achieved. It is the point at which all expenses are covered by the sales proceeds. From this point on, the company starts making profits.
Calculation of the break-even point - methods
There are usually two basic methods that can be used to calculate Break Even Point (BEP).
Method 1: Using the BEP Chart to Calculate Break-Even Point
Fixed costs : costs that are determined without deviations, e.g. wages, rents and tariffs in the business premises.
Variable costs : costs that vary with the amount of products produced or sold, e.g. material costs.
Total costs: Fixed costs plus variable costs for each performance level.
Sales Revenue : The price of the product multiplied by the total sales.
Profit : The difference between total sales and total costs (if sales are greater than costs).
Loss: The difference between total sales and total cost (when the cost is greater than the revenue).
Method 2: Using the BEP Formula to Calculate Break-Even Point
The break-even point (BEP) can also be calculated using a formula as given below,
If the price per unit is $ 20, the unit variable cost is $ 12, and the total fixed cost is $ 8,000, calculate the break-even point.
When calculating the BEP using the break-even point formula given above, the answers can be derived as follows:
Why is it important to calculate the break-even point?
Finding this break-even point is so important for many reasons, as stated below:
- To determine the remaining capacity after reaching the break-even point. In other words, the maximum achievable profit.
- Identify the bottom line impact of replacing automation (fixed costs) with human labor (variable costs).
- In a crisis, it helps the company determine the losses.
From an organizational perspective, managers are responsible for constantly monitoring the BEP in order to reduce the BEP. There are several methods that can be used to do this.
- Cost analysis. It can be used to identify the costs that can be eliminated to reduce the BEP.
- Margin analysis. Keep a close eye on product margins and work on increasing sales of the highest margin items to reduce BEP.
- Outsourcing. Most of the time, there is a focus on outsourcing certain business functions and converting them into variable costs per unit, which reduces the BEP.
- Pricing. Reduce or remove the special offers offered to customers to increase BEP.