The sales level at which a corporation produces exactly zero profit given a hard and fast amount of fixed costs that has got to be paid during each period. This idea is employed to model the financial structure of a business. The calculation of this may be a three-step process.
It is determined by summing the contribution margins generated by all the products of the corporation. This is often income minus all variable costs related to those sales (at least direct materials and commissions). So if your company has sales of $ 1,000,000, direct material costs of $ 280,000, and commissions of $ 20,000, you’ve got a contribution margin of $ 700,000 and a contribution margin of 70%.
Calculates the entire fixed costs that a corporation incurs during the accounting period, like rent, salary, and expense.
To calculate the break-even point in units, use the following formula:
Break-even Point (Units) = Fixed Costs / (Revenue Per Unit – Variable Cost Per Unit)
To calculate the break-even point in dollars, use the following formula:
Break-even Point (Sales in dollars) = Fixed Costs / (Sales Price per Unit x BEP in Units
Divide the entire fixed charge by the contribution margin to succeed in the break-even point. During a continuous example, this suggests that if the fixed charge is $ 500,000, the break-even point sales level is going to be $ 714,285 (assuming the fixed charge of $ 500,000 divided by 70% contribution margin). are going to be calculated).
Assuming that the “accounting” break-even point refers to the Accounting of accounting, the fixed charge portion of the break-even calculation must include the accrual of all expenses normally required for accrual Accounting. Alternatively, you’ll create a “cash” Break-even point where the fixed charge portion of the calculation contains only the prices recorded on an accounting.
Factors that increase the Break-even point of a company
It is important to calculate the break-even point for your company in order to know the minimum goal to cover production costs. However, BEP may increase or decrease depending on certain factors. Some factors are:
1. Increase in Customer Sales
If a customer’s sales increase, it means that there is higher demand. Second, companies need to produce more products to meet this new demand. This will raise the BEP to cover the addi
tional costs.
2. Increased Production Cost
The difficult part of running a business is when variable costs, such as raw material prices, rise, while customer sales and product demand remain the same. When that happens, BEP also goes up due to additional costs. In addition to production costs, other costs that may increase include warehouse rent, increased employee salaries, or increased utility costs.
3. Equipment Repair
If the production line is stagnant or a part of the assembly line breaks down, the target number of units will not be produced within the desired time frame, and the BEP will increase. Equipment failures also mean higher operating costs and therefore a higher break-even point.
How to reduce the Break-even Point
In order for a company to generate higher profits, it needs to lower its BEP. The most effective ways to scale back this are:
1. Raise the Product Price
This is something that not all business owners want to do without hesitation and are afraid that they may lose some customers.
2. Go Outsourcing
If a company chooses to outsource, it can improve profitability. This can reduce manufacturing costs when production increases.