Break even point is an important business calculation component for entrepreneurs. Businesses are threatened with sudden losses without understanding how to calculate the break-even point.
Therefore, before starting a business, try to know and learn about BEP. What is BEP? how to calculate it? What are the benefits?
What is BEP?
Break Even Point is a basic financial calculation that shows how much capital is needed to make this number of products. For this reason, BEP always shows the equation of the total cost and price of the product. For an entrepreneur, an understanding of the break even point is absolute. Without the ability to calculate BEP, businesses will experience many problems, ranging from difficulty determining profit margins to predicting when the business will return on investment. For a trade or investment is determined by comparing the market price of an asset to the original cost; the break even point is reached when the two prices are equal.
Break Even Points can be applied to a wide variety of contexts. For instance, the Break-Even Point in a property would be how much money the homeowner would need to generate from a sale to exactly offset the net purchase price, inclusive of closing costs, taxes, fees, insurance, and interest paid on the mortgage as well as costs related to maintenance and home improvements. At that price, the homeowner would exactly break even, neither making nor losing any money.
Elements of BEP
1. Fixed Costs
The first element of the break even point is fixed costs, or they are also called fixed costs. Fixed costs are the basic costs that a company will invariably incur, even when it is not producing anything. Some examples of fixed costs include the cost of renting buildings, maintenance costs for machines, vehicles, and so on.
2. Variable Cost
The next element of the break even point is variable costs. The opposite of fixed costs, nominal variable costs follow the amount of production produced by the company. Some things included in the variable cost are the cost of raw materials, labor costs, disposable equipment, and so on.
3. Mixed Cost
Mixed costs are a combination of fixed and variable costs. This fee usually has a default nominal that must be paid even if there is no production activity. However, when production is carried out, the number will also continue to increase following production output. Examples of expenses that include mixed costs include electricity bills, water bills, vehicle gasoline costs, engine lubricants, and so on.
4. Cost of Goods Sold (HPP)
After the costs are totaled, a new BEP element will be formed, namely the cost of goods sold (HPP). This price is a pure price whose nominal value is exactly the same as BEP, in fact many people call the two synonymous. Same with BEP, profit value in cost of goods sold is 0.
5. Profit Margins
The last element of the break even point is the profit margin, something you must add to the product’s price once its BEP is calculated. As explained above, determining profit margins is within your power as a business owner. You can set a profit margin of any nominal, according to the selling price of the product you want.
Benefits of BEP
1. knowing the total cost of production
The first point of the benefit of the Break Even Point is to find out the total costs incurred for producing several goods. When calculating BEP, you also automatically calculate your production costs, starting from fixed to variable costs.
2. As a basis for calculation of profit
In the business world, there is a term profit margin, a standard measure of profit for each product. If you want to determine the profit margin, the break-even point is the first thing you need to calculate. For example, you want to get a profit of IDR 10,000 per product sold. Then the ideal price for your product is the nominal BEP plus the profit margin.
3. Estimated payback time
The next break-even point’s benefit is finding out the estimated return on investment. Most businesses must be willing to lose money at the beginning of establishment because product brand awareness has yet to be built. To know how long this loss will occur, a businessman must know how many products must be sold as well as the length of time they have been sold. Without BEP, the estimated number of products sold cannot be calculated, so the duration of sales cannot be estimated.
4. Business profitability analysis
The last point of using the break-even point is to analyze whether the business can profit. The calculation of break-even point is the foundation for determining profitability. You will only know your business profit or loss by learning how to calculate the break-even point.
How to Calculate BEP
There are 3 methods :
- Each unit
The first method in calculating the break even point is to use the BEP per-unit method. The benchmark for this method is the nominal fixed cost, which is then divided by the price per unit after deducting the variable cost. The BEP per unit method is suitable if you want to know the contribution of the product per unit to achieving sales profit.
BEP Per Unit = Fixed Cost / (Price Per Unit – Variable Cost Per Unit)
- Per Sales
The second point of how to calculate the break even point is based on sales value. BEP Per Sales is BEP which is calculated based on fixed costs divided by the difference between the selling price and the ratio of variable cost to price.
BEP Per Sales = Fixed Cost / [1 – (Total Variable Cost/Total Price)]
- Per Fee
The final method of calculating the break even point is based on the cost of goods, minus the profit margin or selling price. This method of calculating the break even point per cost is the most frequently used, because the formula is much easier.
Per Fee = (Total Fixed Cost + Total Variable Cost) / Total Unit)
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