One of the key financial analysis tools used by business owners is calculating break-even point (BEP). It is necessary to find out your break-even point in order to gain business profit, decide the price, set sales budget, and business plan. It also a useful tool to analyze sales volume average production cost and average sales price.
Break-even point is the point that total revenue equals to total expenses. To calculate the company’s break-even point, first find out the fixed and variable cost for the produced items. Calculating break-even point will help the owners to decide how many units to sell at the price point to break even. For example, to calculate break-even point in sales volume, there are three variables needed:
- Fixed cost. An independent cost of sales volume, for example, wages
- Variable cost. A dependent cost on sales volume, such as cost of manufacturing product
- Product selling price
There are two types of formula to calculate Break-Even Point:
- Unit . To calculate the unit produced to have break even: BEP = FC /(P-VC)
- Sales. To calculate the sales revenue to have break even:
FC/ (1 – (VC/P))* Calculation (1 – (VC/P)) generally known as Margin contribution per unit
An example of finding the break-even point
Total Fixed cost (FC) IDR. 100.000.000
Total Variable cost (VC) per unit IDR .60.000
Selling price per unit IDR 80.000
BEP Unit calculation
BEP = FC/ (P – VC)
BEP = 100.000.000/ (80.000 – 60.000)
BEP = 5000
BEP IDR calculation
BEP = FC/ (1 – (VC/P))
BEP = 100.000.000/ (1 – (60.000/80.000))
BEP = IDR. 400.000.000
This analysis helps the business to forecast its profit based on its minimum sales. To calculate the target profit use this following formula:
BEP – Profit = (FC + Profit Target) / (P – VC)
With the same FC, VC, and P in the previous example, the company target profit is IDR. 80.000.000 monthly.
BEP – Profit = (FC + Profit Target) / (P – VC)
BEP – Profit = (100.000.000 + 80.000.000) / (80.000 – 60.000)
BEP – Profit = 180.000.000 / 20.000
BEP – Profit = 9.000 units or
BEP – Profit = IDR. 720.000.000 (9000 units x IDR 80.000)
To ensure that selling 9.000 units is worth IDR. 720.000.000, the gained profit is IDR. 80.000.000:
Sales IDR. 720.000.000
FC IDR 100.000.000
Total VC (IDR 60.000 x 9000 units) IDR 540.000.000
Total cost IDR. 640.000.000
Profit IDR. 80.000.000 ( Sales – (FC + Total VC))
BEP is the most important feature in accounting software and business management. As the business owner, BEP allows you to decide your pricing product, cost incur in business, and sales volume.
