Definition of Break Even Point – Profit and loss in a business is a choice. Of course, every company definitely wants profit and profit. Profit itself can be obtained when the amount of income is greater than the amount of costs incurred. However, it is possible that later the result will be a loss, which is where the amount of expenses incurred is greater than the income received in a certain period.
Therefore, to avoid these losses, entrepreneurs need to know about the Break Even Point or what is more familiar to the BEP. On this occasion, we will discuss more deeply about the meaning of the Break Even Point and its function. So, read this article to the end, Sinaumeds.
Definition of Break Even Point
Break Even Point or abbreviated as BEP is a breakeven point where the profit earned has a value equivalent to that required in a business or can be called not experiencing a loss. In this position, profit is worth 0 (zero) meaning no profit or no loss or for many lay people it is known as return on investment.
This BEP condition can arise if your company uses fixed costs in its operations, while sales volume is only enough to cover the existing fixed costs and variable costs. That way, your company’s profit and loss will be in point 0 (zero) and if the income your company generates is greater than fixed costs and variable costs, then your company is declared a profit.
Definition of Break Even Point (BEP) According to Experts
According to Mulyadi, BEP is defined as break-even, namely a situation in which a business does not make a profit, but also does not suffer a loss. In other words, the business is said to break even if the total income is equal to the total costs, or if the profit contribution is used to cover costs only.
According to Harahap, Break Even Point is a condition or company performance in which there is no profit and no loss. In other words, all costs that have been incurred can be covered from the income of a product.
According to Purba, the Break Even Point is something that is based on a statement such as the number of production units that should be sold to cover the costs that have been incurred to produce the product.
According to Sigit, BEP is the level of sales needed to cover the total operational costs incurred. According to him, BEP is profit before interest and tax or earnings before interest.
According to Rony, BEP is a tool in management that aims to find out whether the selling point is the same as the cost. As a result, the company has neither profit nor loss.
According to Herjanto, Break Even Point is an analysis that has the goal of finding a curve in equivalent costs and income. So, it is not surprising that it is called the main return point.
Function Break Even Point (BEP)
After knowing what is meant by the Break Even Point or commonly called the BEP, the next discussion is the function of the BEP itself.
If the return on investment functions as an analysis of the efficiency of the capital used, then BEP has a function to streamline what is produced in order to obtain optimal profits. For more details, the following are the functions of the BEP, including:
1. Determining the Volume of Goods
BEP has a function to determine the volume of goods to be produced. After being able to determine the volume of production, with BEP, entrepreneurs can determine projected profits from the company.
2. Makes It Easy To Determine Steps
A businessman or entrepreneur can also determine efficient steps for the future. For example, determining steps to reduce the burden that is deemed unnecessary in performance on the company. This can be done by making BEP first.
3. Knowing Changes in Profit Value
The function of the BEP plays a high role in knowing changes in the value of profits that might occur if there is a change in the price of the product. This is actually obtained from the understanding that the BEP value and the price of products sold are in a linear line. Therefore, if one of the points in the definition is high, then the other points in the line will also be high.
Break Even Point (BEP) Basics
An entrepreneur can understand and know finances in a certain period or the next by looking at the BEP from sales. Therefore, it is very necessary to understand the basic concepts in determining this BEP point. Following are some of the basic types of Break Even Points that must be understood and understood:
- The main ingredients in the BEP calculation are fixed costs and variable costs.
- If a change occurs during production, it has no effect on the fixed cost and remains constant.
- The emergence of volume changes from production capacity, of course, affects the value of the overall variable costs.
- If the selling price of the goods is fixed, then during the analysis it will not bring up a change in the set selling price.
- When viewed from the BEP calculation, the number of products produced will always be considered as sold out.
- Calculating the BEP applies to one product, if the company does mass production, it is necessary to equalize the sales of each product.
Benefit from Break Even Points
1. Helping companies/businessmen to take more efficient steps
As previously explained, BEP is one way to calculate whether a product being sold can benefit the company or not. Therefore, by calculating the BEP, it will be easier for the company to determine what steps to take so that the company becomes more developed and advanced.
That way, the company’s economic growth will be easier to increase. Therefore, entrepreneurs should always use the BEP in calculating production goods.
2. Can estimate the return on investment
The second benefit of calculating the BEP for a company is that it becomes easier for entrepreneurs to determine the estimated time to return on investment. That’s right, every entrepreneur or businessman certainly wants to return on investment. By calculating the BEP, businesses can calculate the sales turnover of a product, so they can know when it’s time to return, whether it’s in a matter of years or months.
That way, entrepreneurs or business people can grow the company. In fact, with BEP, business people can find it easier to determine when they need investors.
3. Profitability in a business
The third benefit of the Break Even Point is that it can increase profitability in a business. This can happen because by calculating the BEP, it becomes easier for the company to analyze profits. That way, it can be said that BEP can reduce the risk of loss from a company.
Components that Make Up a Break Even Point
1. Fixed Costs
Types of costs that don’t change or are static with an increase or decrease in the amount of goods or services produced or in simple terms can be interpreted as costs that must be calculated even though at that time the business was experiencing a decline in sales or not producing anything.
2. Variable Costs
Types of costs whose numbers are not fixed or can be said to change, depending on the level of production being carried out. The level of production and variable costs will always be the same and related. Examples of variable costs include raw materials, electricity, water and others.
3. Selling Price
This is obtained from all the costs required in producing an item, plus the profit you want to get.
Income or income derived from all sales of products or services. The amount of income is obtained based on the selling price multiplied by the number of products that have been successfully sold on the market.
The last BEP forming component is not far from the name profit, how to calculate this profit or profit with the remaining income earned minus fixed costs (fixed costs) and variable costs (variable costs).
Break Even Point (BEP) Increase Factor
The following are several factors that can increase the Break Even Point:
1. Increased Sales
When there is an increase in sales by consumers, it can be interpreted as a higher demand. To respond to this, the company certainly needs to increase its production activities. In the end, BEP will increase to cover the cost of the additional production.
2. Increased Production Costs
This increased production cost could also be a factor that increased the Break Even Point. This can be a challenge in itself as a businessman when product demand or customer sales remain the same, but the variable costs increase. Not only production costs, BEP can also increase due to an increase in building rental costs, employee salaries, or utility costs.
3. Equipment Repair
Another factor that can increase the BEP is equipment repairs including production problems. When that happened, the BEP also increased, it was all because of the target number of units that could not be produced according to the set time. Equipment that fails to operate or produces products that fail can also lead to increased operating costs, resulting in a higher break-even point.
How to Reduce Break Even Point (BEP)
In order for your business to generate higher profits, the BEP value must be lowered. The following is the most effective way to reduce the BEP value, including:
1. Raising Product Prices
This step is actually rarely used because the average businessman is afraid of losing his customer. However, to reduce the BEP value to increase profitability, you should consider more deeply about increasing the selling price of this product to the wider community.
Profitability is the ability of a businessman to generate profits in a certain period by increasing sales, certain assets and capital. This profitability can increase if the business chooses to outsource which method can be used to help reduce production costs when production volume increases.
Formula of BEP (Break Even Point)
To calculate this BEP value you can use two different formulas, namely based on units or based on nominal. The unit BEP formula will help you figure out how many units to produce to reach the midpoint or breakeven point. Meanwhile, this nominal BEP formula will help you to find out how much sales value is achieved to reach the midpoint or breakeven point.
The following is the BEP unit formula that you can use:
BEP = Total Fixed Cost / (Product Selling Price per Unit – Variable Cost of Product Unit)
While the nominal BEP formula is as follows:
BEP = Total Fixed Costs / (1 – Variable Cost of Product Units / Selling Price of Products per Unit)
How to Calculate BEP (Break Even Point)
After knowing the two BEP formulas, then the next step is how to calculate BEP by applying these formulas to your sales or production data. For more details, here is an illustration of how to calculate BEP which is very easy to understand.
Mimi owns a school canteen business. The fixed costs required by the business are IDR 10,000,000 per month. The variable cost per unit of product is Rp. 10,000. Meanwhile, the selling price of the food is IDR 20,000. So, how to calculate Mimi’s business BEP is as follows:
BEP = 10,000,000 / (20,000-10,000)
BEP = 10,000,000 / 10,000
BEP = 1,000 units
The illustration above means to reach the breakeven point where Mimi’s business will not incur a loss if Mimi has to produce around 1,000 pax of food in one month.
BEP = 10,000,000 / (1-10,000 / 20,000)
BEP = 10,000,000 / (1- 0.5)
BEP = 10,000,000 / 0.5
BEP = 20,000,000
The meaning of the illustration above is that Mimi’s canteen business is able to break even by making sales of IDR 20,000,000.00 each month.
The definition of BEP or Break Even Point is a break-even point where the profit earned has a value equivalent to that required in a business or can be called not experiencing a loss. In simple language, a company that neither gains nor loses.
This Break Even Point calculation, of course, has many advantages for entrepreneurs to anticipate a loss that will be obtained if what happens is knowing the BEP value from the results of the calculation has decreased in sales of a product and can know a prediction when it will be time for a return on investment.
This BEP technique can also take important steps such as making variations of a product or developing innovations, to its operational nature to help generate maximum profits or profitability.
Apart from that, calculating the Break Even Point is very important because the end result will help business people to determine a product selling price and can determine the profit / profit by adding a very high profit value.
Thus the discussion about the meaning of the Break Even Point and how to calculate it. Hopefully all the discussion above is useful for Sinaumeds.
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