Definition of BEP – In economics, it is not uncommon for us to encounter the term Break Even Point (BEP). This term often appears in business articles that review the conditions that occur in a company. BEP is the point where income and capital issued are at the same point so that there are no losses or profits.
BEP itself is often an indicator for investors to invest their capital. It should be noted that BEP is different from return on investment, but people often confuse the two.
In accounting, return on investment is called Return of Investment (ROI). ROI is the capital spent to run a business and has provided a profit in a certain period. To find out more clearly, the following is a discussion of the Break Even Point (BEP).
Break Even Point occurs when the company’s operations use fixed costs and the amount of sales is just enough to cover fixed costs and variable costs. The company will incur a loss if sales are only enough to cover one of the costs incurred. Meanwhile, the company will get a profit or profit if the sales results exceed the fixed costs and variable costs that have been incurred.
Definition of BEP According to Experts
According to Garrison and Noreen, the definition of BEP is the amount of sales that must be achieved to cover the operational costs incurred by the company as a whole. The achievement of BEP can be seen from the total sales value of the products where the company benefits from net profit with a value comparable to production costs.
According to both of them, the definition of BEP is the value of sales before being subject to tax and interest ( earnings before tax and interest ). This needs to be considered along with other details such as variable costs and fixed costs that must be incurred by the company during the production process.
A management expert, Abdullah said the definition of BEP is one of the indicators used to measure cost-volume-profit analysis . Company management can decide on the selling price of a product after seeing the company’s financial condition by examining several things.
Things that need to be studied are related to the BEP itself, such as determining the minimum production figures, determining the minimum number of products or services sold, and determining the maximum percentage of decline in sales that can still be tolerated.
According to Bambang Riyanto, Rony, and Henry Simamora, the definition of BEP is the amount of revenue generated from sales volume and has the same value as the total costs incurred by the company during production. So at this point the company does not experience a loss or profit.
According to business economics education practitioners, PS. Djarwanto, Sigit, and Mulyadi define BEP as a method used by businessmen, both beginners and professionals, regarding achieving a minimum sales volume so that the business they are in does not suffer losses or profits at zero. People say this zero point is the break even point where the company or business has neither profit nor loss.
Meanwhile, according to S. Munawir and Zulian Yamit, the definition of BEP or Break Even Point is that the total income earned by the company is equal to the total costs required during production. The costs included in the production costs are variable costs and fixed costs.
BEP Basics
To find out the company’s financial condition in the next period, the company’s management team can see the results of the Break Even Point (BEP) analysis resulting from product sales. BEP calculation itself depends on the concept of basic assumptions used in the process. The basis for calculating the Break Even Point is:
- In calculating BEP, the costs required by the company must be divided into two groups, namely fixed costs and variable costs.
- The value of fixed costs will always be constant even if there is a change in production activity. While the value of all variable costs will change according to production capacity or volume.
- The amount of fixed costs will not change even if there are differences in production activities, but the fixed costs for each unit will change.
- During the analysis period, the selling price per unit will be constant so that the selling price of the company is relatively fixed and does not change
- In BEP calculations, the number of products produced will always be considered sold out.
- BEP calculation only applies to one product. So if the company produces more than one different product, it is necessary to equalize the sales of each product.
The basis of this BEP will help in implementing the BEP calculation formula. If this is ignored, it will trigger a calculation error. In other words, these basics are the standing rules for correctly and accurately calculating the Break Even Point (BEP).
Apart from that, there is also the term Break Even Analysis (BEA) which is the basis of all Break Even Point calculation methods . The function of the BEA is to find out the volume of sales that will result in a profit or loss.
Constituent Elements in BEP
Before we start calculating the Break Even Point, there are several components or elements that contribute to the basic calculation of the BEP value. The following elements are contained in the BEP calculation.
1. Fixed Costs or Fixed Costs
Fixed costs, which are the first component in the BEP calculation, are fixed costs that must be incurred by the company when it is not producing or there is a change in production. The purpose of production changes is when the company’s production capabilities change from time to time. Examples of these fixed costs are building rent, machine maintenance, labor, vehicles, and so on.
2. Variable Cost or Variable Cost
In contrast to fixed costs, variable costs are costs incurred by companies that are dynamic in nature, changing proportionally following the amount of production carried out. These costs will increase according to the volume of production, so when production increases variable costs will increase, and vice versa. Examples of variable costs are labor, materials, and disposable equipment.
3. Mixed Cost or Mixed Cost
Mixed costs are the combined costs of variable and fixed costs. Even though it is not in production, this fee must be paid and has a default value . However, when production is carried out, the total cost will continue to increase as well. An example is the cost for water, electricity and petrol bills for operational vehicles.
4. Sales Price
The selling price is the price issued by the company to sell goods or services that have been produced per unit. This price is formed after all costs used during production are added up. The pure price of a product is also referred to as Cost of Goods Sold where the profit is zero and the nominal value is equal to the BEP value.
5. Profit or Profit
The last element that makes up the BEP calculation is the profit or profit margin. This value must be added to the selling price once the BEP has been calculated. There are no specific rules regarding value rules in this section. The amount of value is determined by the company, regardless of the nominal value and in accordance with the desired selling price.
The purpose of the BEP
Break Even Point is the point of balance between income and capital that has been issued so that there is no profit or loss for the company. The purpose of carrying out the BEP analysis is as follows.
- In order to help companies determine the remaining capacity of production after achieving the BEP value and find out the maximum profit that can be obtained.
- To help companies determine more efficient business moves, such as replacing labor with machines. Automation of production can reduce production costs by changing fixed costs and variable costs.
- Helping companies to understand changes in the value of profits when there are changes in product prices.
- Shows potential losses so the company can anticipate when sales declines start to occur.
Benefits of BEP
This Break Even Point can be implemented in large or small businesses because it has various benefits. The following are the benefits of Break Even Point (BEP) analysis on a business or business.
- Find out the total cost required when producing a number of goods. By calculating BEP, we will automatically calculate all production costs from fixed costs to variable costs.
- As a basis for determining the calculation of profits. After calculating BEP, we can add profit margin to generate profit. This profit margin will then be used as a measure of profit from each product sold.
- To estimate the time to return on investment. In the beginning, it was not uncommon for businesses to experience losses because brand awareness had not been fully developed. Therefore, to anticipate losses, a company or business person must know how many products must be sold in a certain period.
- In order to analyze the profitability of a business. This BEP calculation will help us to analyze whether the business will actually generate profits or not. This calculation will be the basis for determining business profitability.
- It is a guideline for companies to know the amount of investment required so that they can offset production costs.
- As a company material to find out the value of stock transactions and the company’s financial description in planning a budget.
- To make business people pay more attention to their business and innovate so that their business fields continue to grow.
Company’s BEP Increasing Factors
BEP calculation needs to be done by a company to find out the minimum target that must be achieved in order to cover production costs. The value of this BEP can decrease or increase depending on various factors. These factors are as follows.
1. Increasing Number of Sales
When the number of sales increases, the demand for an item will increase. Therefore, to meet consumer demand, companies must produce more products. This will result in an increase in BEP to cover the additional costs of production.
2. Rising Production Costs
An increase in production costs can also cause the BEP value to soar. This will be a challenge if the variable costs increase but the demand for the product remains the same.
Variable costs that may experience an increase are the price of production raw materials and employee wages. In addition, rising building rental costs and utility costs such as electricity and water bills can cause the BEP value to increase.
3. Improvements for Production Tools
When the production equipment is damaged, the production process will be interrupted because one of the lines is not working properly. Maintenance or repair of production equipment can also increase the value of the BEP because the production unit target cannot be achieved within a predetermined timeframe.
In addition, equipment that produces products that fail or fail to operate can be a factor in the increase in BEP. This is due to increased operational costs so that the breakeven point soared.
Ways to Lower BEP
So that the company can still get high profits, the value of the Break Even Point must be lowered. To reduce this value, there are two ways to reduce the BEP value.
- Raising the selling price of products is one way that can be done to reduce the value of BEP. However, this method is quite rarely done by companies because it can result in loss of customers. But this method can be considered to reduce the value of the BEP.
- Outsourcing or moving work from one company to another. Profitability is the ability of a company to generate profit within a certain period of time with a certain level of sales, share capital and assets. This capability can be enhanced when a company outsources because it can help to reduce production costs when production volumes have to be increased.
How to Calculate BEP
Break Even Point is used to find the point of equation for costs incurred for production and income derived from sales in one period. In the calculation, there are several ways to calculate the BEP.
1. Break Even Point = Fixed Costs: (Selling price – variable costs)
The selling price and variable cost used in the calculation is the selling price or variable cost per unit of product it produces. The resulting difference from this deduction is the value for the contribution margin. This method is used to find out whether the total expenses are the same as the total costs as well as the number of units issued.
2. Break Even Point = Fixed Cost : Unit Contribution Margin
BEP does not always calculate the total amount. We can also multiply it by the product cost per unit, if we already know how many units must be sold to cover production costs.
The value of this contribution margin comes from the selling price minus variable costs. If you want to get results in Rupiah, then the BEP must be multiplied by the price, resulting in the formula:
3. BEP in currency = Selling price unit × BEP unit
Contribution Margin : Total Sales – Variable Cost
Contribution margin calculations are carried out to find out how much profit a product has sold, by measuring the effect of sales on profits. In this calculation, what must be considered is the amount of variable costs charged, because it relates to the company’s total costs and total sales.
By calculating the contribution margin, the company can separate the fixed costs for production and the profits that the company will get. Thus, the company can find out the price interval per unit of product to be sold.
Conclusion
The definition of BEP or Break Even Point is a balanced point from the results of calculating the income generated with the capital that the company spends. At this point the company gains neither profit nor loss.
This BEP calculation has many benefits for the company, including being able to know the prediction of when it will return on investment. This BEP can also take important steps in business activities, such as product variations and innovations, to operational matters to help companies generate maximum profits or profits.
This BEP calculation is very important because the result will determine the selling price of the product and the company can determine its profit by adding the value of the profit margin.