5 Steps to Make a Break-Even Analysis Efficiently

July 14, 2020

Break-even analysis (BEP) is an important analysis to determine whether a company is developing or not.

A business has to do a break-even analysis because it determines whether the business can last in the long run. There are 5 easy steps to make a break-even analysis or break-even point calculation. Check the information below!

5 Steps to Make Break-Even Analysis Efficiently:

5 Steps to Make Break-Even Analysis Efficiently

1. Determine Variable Unit Costs

There are two types of costs. First is the total variable costs. Total variable costs are costs that change proportionately with the changes in volume or capacity. The greater the capacity, the greater the total variable costs and vice versa.

The second type is the fixed costs. For example, the cost of using gasoline on a vehicle is calculated by mileage but the price of each liter of gasoline remains constant and is not affected by mileage.

As an illustration, the price of petalite is $8 per liter. 1 liter of petalite can cover a distance of 20 km. So what is the calculation of variable costs per unit? In this example, the cost of petalite per km is $8:20 = $0.4.

2. Determine Fixed Costs

Fixed costs can be more important than variable costs and these costs have two characters. The first character is that fixed costs do not change or are not influenced by a particular period or activity.

So the unit fixed cost is inversely proportional to the change in volume. If the volume is low, the unit fixed costs are high. On the contrary, at high volumes, the unit fixed costs are priced low.

For example, carrying capacity of a passenger car is 50 passengers daily so it can carry 1500 people in a month. If you want to increase the number of passengers to be more than 1500 people every month, you must increase the number of cars to transport passengers.

From the total number of passengers, we must calculate the depreciation cost to get the estimated cost per unit with the formula:

(Purchase price - Residual value): Estimated usage

($200,000 - $20,000): 10 years = $18,000.

In this example, fixed costs or annual depreciation costs are $18,000 or $1,500 per month. After the depreciation costs are obtained, the cost per unit of each passenger can be calculated using the formula:

Unit costs per month = Fixed costs per month: Number of passengers per month

3. Determine Unit Selling Price

Determining unit selling price is certainly very important for your business growth and profit. When you set a new selling price, you can then find out how to calculate your sales profit.

The way to calculate net profit per unit can be calculated after finding out the cost and the selling price per unit. Here are some of the important factors in determining selling prices:

I. Customers

A product is intended to attract the attention of customers and potential customers to buy the product. So, you have to make sure that the selling price of your product is indeed a price that can easily be accepted by the customers.

Do not set the price too high because it can be rejected by the customer and do not set it too low because it leads to losses.

II. Competitors

It is also necessary to look at the selling prices offered by competitors who have similar products. You must make sure that the selling price of your product can compete with the selling price of competing products. That means that you also need to pay attention to your level of profit.

If the predetermined level of profit causes the price to be too expensive, then it may be a good idea to apply the method of calculating product profit and loss by lowering the potential profit to get a price that is not too far away from the price offered by competitors.

III. Cost

This is the most important factor in determining the selling price of the product. Do not set the selling price lower than the costs because you will end up with a loss.

4. Determine sales volume and unit price

The break-even points will change as the sales volume and the unit price changes. Calculation of break-even points are as follows:

BEP = FC : (P-VC)

BEP: Break-even Point

FC: Fixed costs

P: Unit price

VC: Variable costs

From this formula, we can observe that the break-even point is equal to the total fixed costs divided by the difference between the unit price and the variable costs. You also have to note that in this formula, fixed costs are expressed as the total of all overhead costs for the company.

While the price and variable costs are expressed as costs per unit or the amount for each unit of product that is sold.

5. Create a spreadsheet

In doing a break-even calculation, you will make or use a spreadsheet then convert the spreadsheet into a graph. The spreadsheet will plot break-even for each level of sales and product prices.

The graph will also show you the break-even for each of the prices and expected sales volumes. Click here for free break-even analysis templates.

Psst... You may also be interested in: 7 Minutes Complete Guide to Business Cash Advance for Startups


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