Definition of BEP (Break Even Point) and How to Calculate BEP

Definition of BEP (Break Even Point) and How to Calculate BEP – Break-Even Point or often abbreviated as BEP is a point or condition where sales and expenses are the same or a condition where the company’s sales are sufficient to cover business expenses.

This break-even point usually compares the amount of revenue or the number of units that must be sold to cover the fixed costs and related variable costs in generating a sale. In other words, the Break Even Point is the point where a business does not suffer losses or gain profit.

Break-Even Point Analysis (BEP) is generally used to calculate when a business/project or project will be profitable by equating total revenue with total costs. With this Break Even Point (BEP) Analysis, Company Management can find out the minimum number of sales that must be maintained so as not to suffer losses and also know the number of sales required to obtain a certain level of profit and help management in making decisions whether to continue or stop the business.

Definition of BEP (Break Even Point) according to Experts

The following are some definitions of BEP or BEP Definition (Break-even Point) according to experts.

  • Understanding BEP according to Yamit (1998: 62), Break Even Point or BEP can be interpreted as a situation where the total amount of revenue equals the total cost (TR = TC).
  • Understanding BEP according to Mulyadi (1997: 72), break-even is a situation where a business does not make a profit and does not suffer losses, in other words, business is said to break even if the amount of revenue equals the total cost, or if the profit contribution can only be used to cover only fixed costs.
  • Understanding BEP according to Simamora (2012: 170), BEP or break-even point is the sales volume where the amount of revenue and total expenses are the same, there is no net profit or loss.
  • Understanding BEP according to Garrison (2006: 335), Break Even Point is the level of sales where profit equals zero, or total sales equal total expenses or the point where the total contribution margin equals total fixed expenses.
  • Understanding BEP according to Hansen and Mowen (1994: 16), Break Even Point is where the total revenues equal to total costs, the point is zero profits “as Break Even Point is where the total total cost revenue is the same, essentially is zero profit.
  • Understanding BEP according to Harahap (2004), Break Even Point is a condition that the company does not make a profit and does not suffer losses means that all costs incurred for production operations can be covered by revenue from product sales.

How to calculate BEP (Break Even Point)

Basically, there are two types of BEP calculations, namely calculating how many units must be sold in order to reach a Break Even Point and secondly, is calculating how many Dollar’s of sales need to be received for a BEP to occur.

The following is the BEP formulas for these two types of calculations.

BEP formula to calculate how many units must be sold in order to occur BEP

The BEP formula for calculating how many units must be sold to cause this Break Even Point can be calculated by dividing the total fixed production cost ( Production Fixed Cost ) by the selling price per unit ( Sales Price per Unit ) minus the cost of the variable used to produce the product ( Variable Cost ). This is the BEP equation or formula:

BEP (in Units) = Fixed Cost of Production / (Selling Price per Unit – Variable Cost per Unit)

Or

BEP (in Units) = Fixed Cost of Production / Contribution Margin per unit

BEP formula to calculate how many Dollar of sales need to be received in order for a BEP to occur

The BEP formula for calculating how many Dollar of sales needs to be received in order for this Break Even Point can be calculated by dividing the total fixed production cost ( Production Fixed Cost ) by the selling price per unit ( Sales Price per Unit ) minus the variable cost used to produce the product ( Variable Cost ) then multiplied by the Price per Unit again. This is the BEP equation or formula:

BEP (in Dollar) = Fixed Cost of Production / (Price per Unit – Variable Cost per Unit) x Price per Unit

Or

BEP (in Units) = Fixed Cost of Production / Contribution Margin per unit x Price per Unit

Information :

  • BEP (in Units) = Break Even Point in units (Q)
  • BEP (in Dollar) = Break Even Point in Dollar (P)
  • Fixed Cost ( Fixed Cost ) = the cost of a fixed amount (whether in production or not)
  • Variable Cost ( Variable Cost ) = cost amount increases as an increasing number of production such as raw materials, auxiliary raw materials, electricity, fuel, etc.
  • Selling price per unit = selling price of goods or services produced by the unit.
  • Variable Cost per unit = total variable cost per Unit (TVC / Q)
  • Contribution Margin per unit = selling price per unit – variable cost per unit (difference)

Case Example Calculation of Break Even Point (BEP)

The following is a case example for calculating BEP (Break Even Point):

A company that manufactures smartphones wants to know the number of units it has to produce in order to reach its break even point (BEP). The fixed cost of production is $ 500 million while the variable costs are $ 1 million. The selling price per unit is $ 1.5 million. How many units must be produced to reach Break Even Point or the break even point?

Note:

  • Fixed Production Costs: $ 500,000
  • Variable Cost per Unit: $ 1,000
  • Selling Price per Unit: $ 1,500

Solution 1: calculate BEP in Units:

  • BEP (in Units) = Fixed Cost of Production / (Selling Price per Unit – Variable Costs per Unit)
  • BEP (in Units) = 500,000 / (1,500 – 1,000)
  • BEP (in Units) = 500,000,000 / 500
  • BEP (in Units) = 1,000 units

So this company must be able to produce and sold 1,000 units of smartphones to reach the Break Even Point.

Settlement 2: calculate BEP in monetary terms (Dollar):

  • BEP (in Dollar) = Fixed Cost of Production / (Price per Unit – Variable Cost per Unit) x Price per Unit
  • BEP (in Dollar) = 500,000 / (1,500 – 1,000) x 1,500
  • BEP (in Dollar) = 500,000 / 500 x 1,500
  • BEP (in Dollar) = 1,500,000 (1.5 billion)

So the company must be able to achieve sales of $ 1.5 million to be able to reach the break even (no profit and no loss).

Calculate the desired profit with Break Even Point (BEP) Analysis Results

After doing the above calculation, we can still calculate the amount of profit that we want by using the BEP calculation results, namely the number of units that must be produced to achieve the profit we want. Here is the formula:

Number of Units = (Desired profit (Dollar) / (Price per Unit – Variable Cost per Unit)) + Number of BEP Units

Or

Number of Units = (Desired profit (Dollar) / Contribution Margin per unit) + Number of BEP Units

For example, the company wants to get a profit or profit of $ 100 million, how many smartphone units should the company produce?

In Dollar:

  • Fixed Cost of Production: $ 500,000
  • Variable Cost per Unit: $ 1,000
  • Selling Price per Unit: $ 1,500
  • Number of BEP Units: 1,000 units
  • Desired profit (Dollar): $ 100,000,000

In unit:

  • Number of Units = (Desired Benefits (Dollar) / (Price per Unit – Variable Cost per Unit)) + Number of BEP
  • Units Number of Units = (100,000,000 / (1,500,000 – 1,000,000)) + 1,000
  • Number of Units = ( 100,000,000 / 500,000) + 1,000
  • Number of Units = 200 + 1,000
  • Number of Units = 1,200

So to get a profit the company must get $ 100 million sales, the company must be able to produce 1,200 units of smartphones.

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