Explanation of the Break Even Point Formula

explanation of the break even point formula

explanation of the break even point formula

BEP, or break event point, is a condition in which the value of income equals the value of operational expenses. This is clearly distinct from the situation in which the profit exceeds the expenditure. However, many people disagree on whether the two are the same. One method is to use the break even point formula.

Method of Calculating the Breakeven Point

Until now, at least, the formula used to calculate a BEP state or break event point has been divided into three methods: marketing, unit contribution, and graph. A more detailed explanation of the three methods can be found below.

Marketing Strategy

The first approach is a marketing strategy. This method can be used with income statement calculations. Of course, the break even point formula must be applied in this method.

Method of Unit Contribution

The unit contribution method is the second method. The basic contribution margin amount is used in this method. In the meantime, the contribution margin is the difference between sales revenue and existing variable costs.

This method allows business actors to learn about the benefits of a product. This method, like the previous one, necessitates the use of a formula.

The Graph Method

The final method is the graph method. In this method, the sales volume is represented by a horizontal line, while the costs are represented by a vertical line.

Break Event Point or BEP Formation Component

It turns out that a component is required to help establish a break even point, also known as a BEP state. It turns out that it is divided into four components that are used in this case. So, what exactly are these components? Let me explain.

1. Predetermined Price

Fixed costs are the first component. Even though the business operations section has changed, this component will remain the same. The change in this case refers to whether or not the owner of the business actor engages in production activity.

2. Purchase Price

When all production costs are added to the cost or profit value, the selling price is the amount of a predetermined price. Furthermore, the selling price is typically derived from the calculated cost per unit after the manufacturing process is completed.

3. Revenue

The revenue generated as a result of the sales process is referred to as revenue.

4. Variable Cost

Variable cost is a value that varies according to the amount of production capacity used. Variable costs can usually rise or fall.

The purpose of the break even point formula is to arrive at the BEP state or break event point.