How to Calculate Break Even Point in Business Plan
How To Calculate Break Even Point (BEP) in Sales and Units.
Let me assume that you don’t know how to calculate break even point. But before we start talking about how to calculate the break even point, it is important you have the understanding of what the break even point is. Break even point analysis is a key financial analysis tool which you need to understand how to use as a business owner. It will help you in your pricing decision.
Break even point is the point at which sales equal costs. That is, a point at which you are able to sell enough units of your product to cover your cost without making a profit or taking a loss. If you sell more quantity at the same price, you will make a profit but if you sell less quantity at your usual price, you make a loss.
Read Also: How to Prepare Cash Flow Forecast for Small Business
How to Calculate Break Even Point
By now, I believe you understand the terms price, fixed cost and variable cost. If you don’t, I advise that you read our previous article entitled, “How Do You Price Your Products?”. The terms were discussed fully there. Without the understanding of these terms, you will not know how to calculate your break even point. To calculate break even point, you need to get the value of the price, total fixed costs and your variable costs. We can then do a simple calculation by using this formula:
Break even Point (in Units) = Fixed Costs/(Price – Variable Costs)
The result of the above formular will give you the total units of product you need to sell at your selling price before you can break even. If you want to know the break-even revenue, you simply multiply the break-even units by the selling price. That is
Breakeven Revenue (Naira) = Breakeven Units x Unit Price
Example: 1
We shall use the example below to practise how to calculate Break Even Point both in Price and in Units.
Let’s assume that your monthly fixed costs comprise: Rent N20,000, Salaries N150,000, Depreciation N30,000, Other fixed costs N50,000. The variable costs of your product sum up to N10,000 while you sell at N15,000. The break even point will be calculated as follows:
Total Fixed Costs = N250,000
Variable Costs = N10,000
Price = N15,000
Remember that Break even Point (in Units) = Fixed Costs/(Price – Variable Costs)
Then BEP (in Units) =250,000/(15,000 – 10,000)
BEP (in Units) = 50 Units.
This means that you have to sell 50 units of your product per month before you can break-even, that is; no gain, no loss.
To know the amount you need to earn as revenue to break-even, you will multiply the break-even units by the price of the product.
Break-even Revenue (Naira) = 50 units x N15,000 = N750,000
You may want to test if you know how to calculate it correctly. This can be confirmed as follows:
=N= =N=
Break-even Revenue 750,000
Less:
Variable Costs (50 units x N10,000) 500,000
Total Fixed Costs 250,000
750,000
Profit NIL
Example 2
Let’s see what happens if you sell 55 units using the information in example 1
=N= =N=
Revenue (55 units x N15,000) 825,000
Less:
Variable Costs (55 units x N10,000) 550,000
Total Fixed Costs 250,000
800,000
Profit 25,000
Once you know how to calculate your BEP units, your profit will be determined by multiplying the quantity you sell over and above the BEP units by your margin. Margin is the difference between selling price and variable costs.
From the second example above, the number of products sold over and above the BEP Units is 5 Units (55 – 50). Margin is calculated as price minus variable costs. That is N15,000 – N10,000 =N5,000
Profit = 5 units x N5,000 = N25,000
The same thing applies when you sell below BEP (units). For example, if you sell only 40 units, you are 10 units below the BEP units. The loss will be calculated as follows:
=N= =N=
Revenue (40 units x N15,000) 600,000
Less:
Variable Costs (40 units x N10,000) 400,000
Total Fixed Costs 250,000
650,000
Loss 50,000
Alternatively, you can calculate the loss by multiply your margin with the difference between your break-even quantity and the actual quantity sold.
Loss = 10 units x N5,000 = N50,000
Note: If this method is confusing, I advise that you adopt the method in the first two examples. It will give you the same result.
After calculating your Break even Point, if it seems unrealistic to achieve your Break even sales, it will be good you reduce your fixed costs to a reasonable level as much as possible. The secret here is that, the less you spend on fixed overheads, the less you will have to sell to achieve your break-even sales. For instance, if you reduce the salary you are paying out by half, your business might be more efficient as you won’t need to be paying too much expenses. The less your fixed expenses, the more of your revenue you can retain as profits. If you see some organizations laying off their staffs, it is because they want to cut down their fixed overheads so that they can achieve profitability.
Read Also: How to Adjust Price to Maximize Profit
That is how to calculate your Break Even Point. You need to master it as you will need it while preparing your business plan.