In the business world, the break-even point is the situation where the nominal revenue equals the total cost or expenditure (production cost, marketing cost, or other expenses). There are many benefits of BEP for a company, such as knowing the breakeven point, optimizing the selling price, reducing the risk of losses, etc.
For a complete explanation of the benefits of BEP and the basic assumptions in determining BEP, please read this article until the end.
5 Basic Assumptions for Determining BEP
Before reading about the benefits of BEP, it’s good for you to know the common basic assumptions used to determine BEP, which are:
1. Details of Costs Incurred in the Production Process
You must calculate the detailed costs that may arise during the production process. This needs to be done before launching products, services, or business services into the market.
Then, accumulate these costs to find the total production cost. Only then can you calculate the appropriate selling price and potential breakeven point.
For a guide to determining the selling price, as well as the cost of goods sold, you can read the following articles:
- How to Determine and Calculate the Selling Price Along with Its Formula.
- Calculate the Selling Price of a Product for a Big Profit.
- Calculate the Cost of Goods Sold (COGS) & Selling Price Easily.
2. Classification of Fixed Costs and Variable Costs
Generally, there are two types of costs that arise in the production process, namely fixed costs and variable costs.
Fixed costs are expenses that occur every month, such as electricity usage costs, telephone costs, raw material purchasing costs, or production site rental costs.
Meanwhile, variable costs are expenses that occur occasionally as needed to support the production process. Examples of variable costs include repair costs for production equipment, overtime costs during high product demand, etc.
Basically, the BEP can only be accurately calculated when most of the expenses are fixed or capital expenditures.
3. Assumption of Fixed Cost Policies Without Sudden Changes
The benefits of BEP for a company can be achieved if the fixed costs that frequently occur during the production period do not experience sudden increases.
Why? Because when fixed costs experience sudden changes, then you, as a business owner, will have to adjust the selling price to ensure that no losses occur.
4. Assumption of Equal Sales and Production Levels
There is an assumption that the sales level is equivalent to the production level. It means there is no stockpile, and all goods are assumed to be sold out.
This indirectly explains that the business is in a break-even condition, not making a profit but not incurring losses either.
If you want to make a profit in the future and enjoy the benefits of BEP, then as a business owner, you must recalculate more carefully. Determine the quantity of product production, possible innovations, and the selling price to gain more profits.
5. The Company Only Sells One Type of Product
The explanation for this assumption is that when a company is considered to only sell one type of product, the benefits of BEP for the company can be determined by the speed of the product being sold in the market or consumer interest in that product.
However, if you are not used to it, you will generally have difficulty setting suitable standards for the product related to the Break-Even Point (BEP).
That’s why there are now several types of applications that can be used, such as the iReap cashier application, which can help you apply the BEP assumption and how business efforts can quickly reach BEP.
Benefits of BEP for the Company
1. Better Decision Making
By understanding BEP, you as a business owner can make smarter and informed decisions. For example, calculating BEP can help the company determine an optimal selling price so that the business can make a profit.
If the selling price is too low, the company may not be able to reach BEP and may incur losses. On the other hand, if the price is set too high, sales figures may decline, ultimately hindering the company from reaching BEP.
2. Maximizing Profits
The benefits of BEP for the company undoubtedly include maximizing profits. When the company knows the point that needs to be achieved, it can determine a better selling price so that the business can generate profits.
Example: The company can calculate operational costs and identify areas where cost savings can be made. By reducing costs, the company can increase net income and achieve BEP faster.
3. Well-Maintained Financial Stability of the Business
Understanding BEP can also help the company achieve financial stability. When the business reaches BEP, it means you are already generating a profit. This can help you reduce financial risks and prepare for growth.
Overall, understanding and implementing the concept of BEP can provide many benefits for the company. From making smarter decisions to increasing profits and financial stability. So, how do you calculate BEP? Check it out here: How to Calculate BEP.