The Break-Even Point (BEP) is a crucial benchmark for determining a business’s profitability. Knowing it provides business owners with a comprehensive understanding of their operations. However, before learning how to determine the BEP price, learn everything you need to know in this article!
What is BEP?
According to Indeed, the Break-Even Point (BEP) is the point at which a business generates as much revenue as it spends. This equation indicates how many units must be sold before a business generates a profit.
When the company reaches the break-even point, it neither makes a profit nor incurs a loss. That’s why BEP is called the break-even point—where sales revenue covers all costs.
The Importance of Knowing BEP
As a business owner, you certainly need to understand why calculating the Break Even Point (BEP) can provide a comprehensive overview of your business operations. Here are some reasons.
1. Helps Create Pricing Strategies
By conducting a break-even analysis, you can determine the minimum price you should charge for your product or service. This information is invaluable for understanding which pricing strategy will best generate profit.
2. Determine Sales Targets
Smart sales targets must be calculated based on data and facts. In this case, BEP can help you determine your expected revenue target. This way, business owners know exactly how much to expect from their sales team.
3. Keep an Eye on Hidden Expenses
Conducting a break-even analysis can help you identify missing costs and determine which ones to cut. This way, you can track anticipated expenses—without causing a mess later.
4. Limiting Decisions Based on Emotions
Making business decisions based on emotion is never a good idea—although it’s hard to avoid. This is where a break-even analysis provides you with solid facts and offers a better perspective for making business decisions.
5. Accommodating Funding Needs
As mentioned, BEP is one indicator for assessing profitability. Naturally, this serves as a warning to potential investors, allowing them to assess the prospects of your business offering, and thus encourage them to invest their money.
Rumus untuk Menghitung BEP
To find the break-even point, you can calculate the BEP using the available formula. The basic BEP formula is to divide fixed costs by the gross profit margin, as shown below.
BEP = Fixed Cost / Gross Profit Margin
However, some companies, especially small businesses and startups, only use this basic formula for financial reporting purposes. For more practical purposes, BEP is more often calculated in units (BEP in units) and sales (BEP in sales), as explained below.
1. BEP Formula in Units
Here is the BEP formula based on the number of units sold:
BEP (in units) = Fixed Costs / (Price per Unit – Variable Costs per Unit)
To better understand it, here is a description of each cost component:
- Fixed costs are all expenses that remain constant regardless of fluctuations in the quantity of goods or services sold. Examples include building rent and permanent employee salaries.
- Harga per unit adalah harga jual untuk setiap produk/jasa yang ditetapkan oleh tim penjualan.
- Variable costs per unit are the costs required to produce each unit of a product/service. Examples include raw materials and product packaging.
The BEP equation above is used to determine how many products must be sold to reach the break-even point. This relates to the minimum sales target the sales team must achieve.
2. BEP Formula in Sales
Berikut adalah rumus BEP berdasarkan jumlah penjualan:
BEP (in sales) = Fixed Cost / [(Price per Unit – Variable Cost per Unit)/Price per Unit]
This equation looks similar to the previous BEP formula, but it has one key difference. Instead of dividing fixed costs by the profit earned from each sale, this equation divides fixed costs by how much value is earned from each unit—this is called the profit margin.
So instead of looking at how many products need to be sold to reach BEP, this equation calculates the amount of money that needs to be made to break even.
How to Determine Break Even Price?
After learning the formula for calculating BEP, it’s time to actually learn how to calculate it. To make it easier, let’s use the following illustration.
Mrs. Untung owns a cake shop that sells birthday cakes. After calculating her balance sheet, Mrs. Untung found that the fixed costs to operate the cake shop, including shop rent, employee salaries, and building taxes, total Rp 50,000,000.00. Meanwhile, the variable costs to make cakes are Rp 250,000.00 per unit and sell them for Rp 500,000 per unit. So, what is the break-even point for Mrs. Untung’s cake shop?
- BEP (in units) = 50.000.000 / (500.000 – 250.000)
= 200 unit
- BEP (in sales) = 50.000.000 / [(500.000 – 250.000) / 250.000]
= IDR 50.000.000,00
So, Mrs. Untung will reach her break-even point if she has sold 200 birthday cakes or generated sales worth 50 million Rupiah.
How to Use BEP?
Apart from asking how to calculate it, there is another equally important question, namely how to interpret the results of the calculations that have been completed.
Once you have the numbers, you might need to ask yourself if your current plan is realistic. Do you need to raise your selling price, cut production costs, or both?
Additionally, you also need to consider whether this plan will be successful in the market. What if the price is too high and people won’t buy it?
Yes, just because a break-even analysis can determine the quantity of product you need to sell, there is no guarantee that the product will sell.
However, this financial analysis should ideally be conducted before starting a business so you can understand the risks. In other words, you can consider whether the business is viable.
You can also use this analysis before launching a new product or service to determine whether the potential profits are worth the initial costs.
That was the answer to the question of how to determine the cost of goods sold (COGS). Now you understand why studying business financial reports is so important, right? Yes, because it can help you make more strategic decisions.
Thankfully, you don’t have to worry about creating your own financial reports. With Labamu, your business financial reports are automatically generated, so you only need to study them. Take advantage of this convenience by downloading the app from Google Play or the App Store.
