In business and economics, many important terms need to be learned and understood. One is Break Even Point (BEP) or “break-even point.” The term is often used by business people when analyzing the condition of a company.
Not infrequently, investors use the company’s Break Even Point as a parameter in evaluating their investment decisions.
With such an important role, BEP has become one of the essential terms in economics and business that many individuals should master.
Individuals and organizations often use BEP in various fields, including in the crypto world. BEP analysis in crypto is useful when calculating profits and losses.
It helps crypto traders make necessary changes in their trading strategies.
Additionally, BEP is an indicator of mining profitability. BEP considers the price of the crypto being mined and factors such as mining rig components, electricity consumption, and other costs.
To understand what Break Even Point is, its definition according to experts, its functions, the components that make it up, the formula, and how to calculate it, check out the full review below.
What is Break Even Point?
Break Even Point (BEP) is when the sales and production costs are at the same position so that the company does not profit or incur a loss.
BEP occurs when a company uses fixed costs (cost management, routine costs) in a project while the level of sales is only enough to cover other fixed and variable costs.
It is important to understand BEP so that companies can make the right decisions, such as increasing product prices or reducing operating costs.
In principle, BEP provides information on prices, profits, and other metrics that must be achieved to avoid losses.
BEP aims to reduce production and operational costs and keep those costs to a minimum without sacrificing product quality or quantity.
Referring to its history, the concept of BEP was first recognized in the early 20th century, and in the 1930s, Break Even Point analysis was further developed. One of the famous books that discussed BEP was the French La Theorie de l’Equilibre Economique.
Since then, methods and ways to calculate the company’s BEP have become increasingly popular and are often used to analyze the balance between production costs and revenues in various business activities.
Definition of Break Even Point by Experts
After understanding what Break Even Point (BEP) is, it is important to know the definition of BEP according to experts. Quoting e-journal.uajy.ac.id/, here are some definitions that need to be known, including:
1. Harahap
According to Harahap, Break Even Point (BEP) refers to the condition or performance of a company where there is neither profit nor loss. In other words, at this point, all costs incurred can be covered by the revenue generated from a product.
2. Mulyadi
Mulyadi defines Break Even Point (BEP) as a break-even point, which describes a condition where a business does not make a profit but does not experience a loss. A business is considered to break even if the revenue earned is equal to the total costs or if the profit contribution is used to cover costs only.
3. Sigit
Sigit explained that Break Even Point (BEP) is the level of sales required to cover the total operational costs incurred. For him, BEP is profit before considering interest and taxes or earning before interest.
4. Purba
Purba states that Break Even Point (BEP) is based on a statement regarding the number of production units that need to be sold to cover the costs incurred in the product’s production process.
5. Herjanto
Herjanto explains that Break Even Point (BEP) is an analysis that aims to identify comparable cost and revenue curves. Therefore, it is unsurprising that BEP is referred to as the point of return.
6. Rony
Rony reveals that Break Even Point (BEP) is a management tool used to determine the point at which sales proceeds are comparable to costs. As a result, the company experiences neither profit nor loss.
7. Hansen/Mowen
The definition of Break Even Point (BEP), according to Hansen/Mowen (2009), is the point at which total revenue equals total cost, i.e., profit reaches zero.
8. Raiborn & Michael
Raiborn, in view (Raiborn & Michael, 2011), defines break even point as the level of activity, either in units or nominal value, at which total revenue equals total costs.
The Function of Break Even Point (BEP)
After understanding the definition of Break Even Point (BEP), the next step is to explain the function of BEP itself. If the return on investment is used to analyze the efficiency of invested capital, BEP has a role in optimizing production to achieve optimal profits.
Quoting gramedia.com/literasi/pengertian-break-even-point, the following are some of the functions of BEP that you need to know:
1. Determining the Volume of Goods
BEP serves to determine the volume of goods to be produced. With BEP, entrepreneurs can identify the volume of production that will provide projected profits for the company.
2. Make it Easy to Determine Steps
Businessmen or entrepreneurs can use BEP as a guide to take efficient steps in the future. For example, BEP can help determine steps to reduce expenses that are considered unnecessary in the company’s operations to provide the necessary basic framework.
3. Monitoring Changes in Profit Value
The BEP function is very important in monitoring changes in the value of profits that may occur due to changes in product prices. This concept comes from the understanding that the BEP value and the price of the product sold are linear.
Thus, if one of the points on the linear line increases, the other points on the line will also increase. As a result, BEP helps anticipate the impact of price changes on the value of profits.
What Are the Benefits of Break Even Point?
By now, you have understood the function of Break Even Point (BEP). Next, it is important to know what are the benefits of BEP. Here are some of the benefits:
1. Helps Companies/Businesses to Take More Efficient Steps
As described earlier, BEP is a method to assess the profitability of a product in a company. By calculating BEP, companies can more easily determine the steps needed to improve the development and progress of the company.
That in turn, can support the economic growth of the company, and therefore, it is important for entrepreneurs to regularly use BEP in evaluating the production of goods.
2. Can Make an Estimation of Turnover Time
The second benefit of BEP calculation in a company is the ease of entrepreneurs in determining the estimated payback period. Every entrepreneur or businessman certainly wants a fast return on capital.
Through BEP calculation, businessmen can estimate product sales turnover and determine the right time to achieve a return on capital, both in monthly and annual periods.
With this information, entrepreneurs can plan growth strategies and determine when to seek investors.
3. Profitability in a Business
The third benefit of Break Even Point is its ability to increase business profitability. By calculating BEP, companies can do a better analysis of profits.
It reduces the risk of possible losses and simultaneously increases the overall profitability of the business. In other words, BEP helps a company in risk management and decision-making that positively impacts its profitability.
What Are the Components that Make Up the Break Even Point?
The following are some of the components that make up the Break Even Point that are important to know, including:
1. Fixed Cost
This type of cost is constant and unchanging, not depending on the increase or decrease in the volume of goods or services produced. In other words, these costs must still be incurred even if the business is experiencing a decline in sales or is not producing anything.
2. Variable Cost
It is a type of cost that can change depending on the level of production being carried out. Production levels and variable costs are always linked. Some examples of variable costs include raw materials, electricity, and water expenses.
3. Selling Price
It is the result of the summation of all costs involved in the production process of an item plus the profit desired by the company.
4. Revenue
It is the total income earned from selling all products or services. This amount of revenue is calculated based on the selling price multiplied by the number of products successfully sold in the market.
5. Profit
As the last component that makes up the Break Even Point (BEP), profit results from the difference between total revenue and total costs, including fixed and variable costs.
Profit calculation is done by subtracting fixed costs and variable costs from the total revenue earned.
The Formula and How to Calculate BEP in Investment Based on 2 Types
Two formulas can be used to calculate the Break Even Point (BEP) value, namely based on units or nominal. The unit-based BEP formula helps determine the number of units that need to be produced to break even or midpoint.
Meanwhile, the nominal-based BEP formula helps identify the sales value that must be achieved to break even. Here is a unit-based BEP formula that can be used:
BEP = Total Fixed Cost / (Product Selling Price per Unit – Product Unit Variable Cost)
On the other hand, the BEP formula based on nominal can be formulated as follows:
BEP = Total Fixed Cost / (1 – Product Unit Variable Cost / Product Selling Price per Unit)
How to Calculate BEP in General
After understanding the formula for calculating Break Even Point (BEP), here is an example of calculating BEP for a fleet delivery service company.
1. Identify Fixed Costs and Variable Costs
- Fixed Costs: Driver salary per month IDR5,000,000, fleet insurance per month IDR2,000,000, and garage rental per month IDR3,000,000. Total fixed costs: IDR10,000,000.
- Variable Costs: Average fuel per trip IDR1,000,000, average maintenance, and spare parts cost per month IDR1,500,000. Total variable costs: IDR2,5000,000.
2. Calculate the Unit Price
To get the contribution margin, calculate the unit price the company receives, in this case, the cost of shipping goods. For example, the cost per shipment: Rp1. 500.000.
3. Margin Contribution
Margin Contribution = Selling Price per Shipment – Variable Cost per Shipment
Margin Contribution = Rp1,500,000 – Rp2,500,000 = – Rp1,000,000
From the example, a negative margin contribution indicates that each shipment results in an initial loss. However, you can calculate the BEP to know the number of shipments required to break even.
4. Calculate Break Even Point (BEP) of Shipments
BEP (in shipments) = Total Fixed Cost / Contribution Margin per Shipment
BEP (in shipments) = Rp10,000,000 / – Rp1,000,000 = 10 shipments
From the example, the company must make at least 10 deliveries to break even.
How to Calculate BEP in Stocks
Calculating Break Even Point (BEP) in the stock market is simple. As an illustration, we can take the example of buying shares of company A at a price of Rp11,000. A profit will be made if the share price rises above Rp11,000.
However, conversely, if the share price falls below Rp11,000, there will be a loss when selling the shares. If, at the time of sale, the share price remains at Rp11,000, then BEP has been reached because, at that point, no loss or profit is experienced.
How to Calculate BEP in Crypto
In the crypto world, there is a term called Break Even Multiple. The term refers to how many times the price of an asset must increase to be comparable to the price at the time of purchase, plus brokerage and trading fees.
For example, let’s say you bought Bitcoin at Rp1,000,000, but now its value has dropped to Rp250,000. In this situation, the price of the bitcoin asset must return to Rp1,000,000 to break even (BEP), with the Break Even Multiple value calculated as follows:
(Asset purchase price + Trading fees and other fees) / (Current asset price)
Rp1,000,000 / Rp250,000 = 4
So, it can be concluded that the asset value needs to increase 4 (four) times to break even (BEP).
Can Cutting Transaction Costs Help Increase BEP?
Quoting cryptowallet.com/glossary/break-even-point-bep, the BEP position can be best understood as the reciprocal relationship between income and expenditure. Therefore, if expenses increase for various reasons, then the balance of the BEP position will be disturbed.
Each asset can have a different BEP position depending on its specific operational properties and will run different levels of operating expenses.
With that in mind, it is possible to keep a valuable asset but still incur losses due to high costs.
For example, crypto miners often use BEP placement to understand better the interaction between their operating costs and potential profits. Crypto mining is often expensive, with costs associated with energy usage, hardware maintenance, and material replacement.
Therefore, making a profit can be a complex operation, and as such, cutting operational costs, where possible, becomes crucial to breaking even on the operation.
Conclusion
In conclusion, Break Even Point (BEP) is the point at which the sales and production costs are at the same position so that the company does not profit or incur a loss.
Some of the functions of BEP are to determine the volume of goods, make it easier to determine the steps and find out changes in the value of profits.
Meanwhile, the benefits of BEP, among others, help companies/businessmen to take more efficient steps, estimate the payback period, and (3) profitability in a business.
On the other hand, it’s important to remember that success in crypto investing relies heavily on careful research and a deep understanding of the market.
By emphasizing research and understanding the crypto market, you can increase your chances of investment success, reduce risk, and make smarter decisions based on valid data.
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