In business, it is important to understand how much you need to sell a product in order to break even or Break Even Point (BEP) . BEP is the point at which the income generated is equal to the costs incurred, so that no profit is made or a loss is made. Learn more here!
What is Break Even Point (BEP)?
Break Even Point (BEP) is the point at which the income generated is equal to the costs incurred. In other words, BEP is the point at which a business makes neither a profit nor a loss.
BEP itself is one of the basic concepts in cost-benefit analysis. By understanding it in depth, you can be helped to make better decisions in business and various businesses.
Understanding Break Even Point (BEP) According to Experts
Several business experts have different definitions of BEP. However, basically, BEP is the point at which a business makes no profit or loss. Here's the list!
- Mulyadi: BEP is a break-even situation where a business does not make a profit, but also does not suffer a loss. This happens if the amount of income is the same as the amount of costs, or if the contribution profit is used to cover service costs.
- Please: BEP is the condition or performance of a company where there is no profit and no loss. This means that all costs that have been incurred can be covered by the income from a product.
- Horngren, Sundem, and Stratton : BEP is the point at which total revenue equals total costs.
- Hansen and Mowen : BEP is the point at which total costs equal total revenue, so that the company experiences no losses or profits.
- Kieso, Weygandt, and Warfield : BEP is the point at which the company experiences neither profit nor loss.
- Garrison and Noreen: BEP is the point where revenue equals total costs and net profit equals zero.
Goals and Benefits of BEP
For business owners, understanding the goals and benefits of BEP is an important key to planning effective business strategies and making the right decisions.
- Calculating Total Production Costs
Before calculating BEP, business owners must understand the total cost of production. Production costs consist of fixed costs and variable costs. Fixed costs are costs that remain the same no matter how many products are produced, such as rent for a building or salaries for permanent employees. Meanwhile, variable costs are costs that change according to production, such as raw materials or wages for production workers.
To calculate total production costs, business owners must add up fixed costs and variable costs. For example, if fixed costs are IDR 10 million and variable costs are IDR 5 million to produce 100 units of product, then the total production cost is IDR 15 million.
- Calculating Profit Amount/Margin
After understanding the total production costs, business owners can calculate the profit amount/margin. Profit margin is the difference between the product selling price and production costs per unit.
To calculate profit margin, a business owner must subtract the production costs per unit from the selling price per unit. For example, if the selling price per unit is IDR 100 thousand and the production cost per unit is IDR 50 thousand, then the profit margin is IDR 50 thousand per unit or 50%.
- Planning and Calculating When to Return on Investment
BEP helps business owners to plan and calculate when the business will return on investment. Break-even is when the income from product sales is equal to production and operational costs. To calculate when a business will return on investment, business owners must calculate BEP.
For example, if the total production cost per month is IDR 500 million and the selling price per unit is IDR 1 million, then the BEP is 500 units per month. If the business owner can sell 500 units of product per month, then the business will return on investment.
- Business Feasibility/Profitability Analysis
Business feasibility or profitability analysis helps business owners to know whether their business is viable and profitable. This analysis can be done by calculating BEP and profit margin. If the BEP is high and the profit margin is low, then the business may not be viable and profitable.
However, analyzing the feasibility or profitability of a business is not only based on BEP and profit margins. Business owners also need to consider other factors such as the market, competition, and trends in the business itself.
For example, if the market is highly competitive and demand for the product is low, then the business may not be profitable despite high BEP and profit margins. Conversely, if the market is booming and competition is low, the business may be profitable even though BEP and profit margins are low.
Break Even Point (BEP) Elements/Components
In calculating the Break Even Point (BEP), there are several elements or components that must be known. Here's the list!
- Fixed cost
Fixed costs are costs that do not change even if the amount of production or sales changes. Fixed costs include employee salaries, building rental and administrative costs.
- Variable Costs
Variable costs are costs that change according to the amount of production or sales. Variable costs include raw material costs, direct labor costs, and shipping costs.
- Cost of goods sold
Cost of goods sold is the total costs incurred to produce and sell a product or service. Cost of goods sold includes fixed costs and variable costs.
- Revenue/Profit Margin
Revenue/profit margin is the difference between the selling price of a product or service and the variable costs incurred. The resulting revenue/profit margin must be sufficient to cover fixed costs and reach the break-even point or BEP.
Formula for calculating BEP
To calculate the Break Even Point (BEP), there are several formulas that can be used. Here are some of them!
- Formula for calculating BEP units
The formula for calculating unit BEP is as follows:
BEP Unit = Fixed Cost / (Unit Price – Unit Variable Cost)
- Formula for calculating BEP Rupiah
The formula for calculating Rupiah BEP is as follows:
BEP Rupiah = Fixed Costs / Contribution Margin
The contribution margin itself is the difference between the selling price and unit variable costs.
Example of calculating BEP units
For example, a company sells a product with a unit price of IDR 20,000 and a unit variable cost of IDR 10,000. The fixed costs incurred by the company are IDR 50,000. So, how many products must be sold for the company to reach BEP?
BEP Unit = Fixed Cost / (Unit Price – Unit Variable Cost)
BEP Unit = 50,000 / (20,000 – 10,000)
BEP Units = 5,000 units
So, the company must sell a minimum of 5,000 units of product to reach BEP.
Example of calculating BEP Rupiah
For example, a company has fixed costs of IDR 300,000,000 and a contribution margin of 30%. What sales value must the company achieve to achieve BEP?
BEP Rupiah = Fixed Costs / Contribution Margin
BEP Rupiah = 300,000,000 / 0.3
BEP Rupiah = 1,000,000,000
So, the company must achieve sales of IDR 1,000,000,000 to reach BEP.
Factors that Increase the BEP Period
When a business has reached BEP, the company will start to achieve profits. However, there are several factors that can increase the BEP period, namely:
- Increased Goods Production
If the company decides to increase production, then production costs will increase. As a result, it will increase the BEP period. This is because the more goods produced, the more production costs are incurred.
- Production Material Costs Rise
An increase in production material costs can have a major impact on the BEP period. If production material costs increase, overall production costs will increase and it will take longer to reach BEP.
- Tool Repair
If the machines or equipment used in production are damaged and require repair or replacement, production costs will increase. This can increase the BEP period because production costs will increase.
How to Speed Up the Break Even Point (BEP) Period
In business, the sooner the BEP period is reached, the better the company's financial condition will be. Here are several ways to speed up the minimum BEP period per point.
- Increase the number of product sales
One way to speed up the BEP period is to increase the number of product sales. The more products sold, the faster BEP is achieved.
Therefore, companies need to carry out effective and efficient marketing strategies so that their products can be recognized by consumers and gain their interest.
- Increase Prices/Increase Profit Margins
Apart from increasing sales, another way to speed up the BEP period is to increase product prices or increase profit margins.
However, it should be noted that price increases must be adjusted to market conditions and consumer purchasing power. Don't let price increases make consumers switch to cheaper competing products.
- Reducing Production Costs
Another way that can be done to speed up the BEP period is to reduce production costs. Low production costs will enable companies to achieve BEP more quickly.
Companies can make production cost efficient by looking for cheaper but still quality raw materials, optimizing the use of electrical energy and water, and minimizing damage and failure to production machines.
- Labor Efficiency
Labor is an important factor in the production of a product. To speed up the BEP period, companies need to ensure that the workforce they have is efficient and effective in carrying out their duties.
Companies can provide training for workers so that they can improve work quality and productivity, so that production times can be faster and production costs can be reduced.
From the review above, it can be concluded that BEP can crucially influence business decisions. The reason is, BEP can provide accurate information about the financial health of a business.
By knowing BEP, entrepreneurs can determine the right strategy to increase sales and reduce costs. Hopefully this article can give Bizharian Friends insight into what BEP is and its role in business.
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