Decreasing fixed costs by finding better deals on raw materials can also help reduce the BEP. Raising prices can increase the profit margin for each product sold, but it may also discourage customers from buying. There are several strategies for reducing your break-even point, including raising prices, decreasing fixed costs, and increasing sales. Reducing your BEP is a great way to increase the profitability of your company.
Finding the balance between paying employees a fair wage and keeping the BEP at an acceptable level can be a challenge.
An increase in labor costs will raise the BEP, while a decrease will lower it. However, upgrading equipment can also lead to greater efficiency and lower labor costs, which can help reduce the BEP in the long run.Ĭhanges in labor costs also affect your BEP. Upgrades or repairs to equipment can be expensive, leading to increased BEP.
Conversely, a decrease in production costs will lower the BEP, resulting in a higher profit margin for each product sold.Įquipment repairs are another factor that can affect your BEP. If production costs increase, it will cost your business more to produce each product, which will increase the BEP. It is important to be aware of how an increase in sales will affect your BEP.įluctuations in production costs can also affect your BEP. An increase in sales is generally considered a positive for your business, but it can also lead to an increase in production costs, as you need to purchase more raw materials and pay more workers to produce the products. There are four factors that can affect your BEP:Īn increase in sales, fluctuations in production costs, equipment repairs, and changes in labor costs. The result is the total sales revenue you need to generate in order to break even. In the second equation, you divide the fixed costs by the contribution margin ratio (1 minus the variable cost as a percentage of sales). The result is the number of units you need to sell in order to break even. In the first equation, you divide the total fixed costs by the contribution margin per unit (price per unit minus variable cost per unit). There are two main equations used to calculate the break-even point, depending on whether you want to calculate the BEP in units or dollars:īEP (in units) = Fixed Costs / (Price per Unit – Variable Costs per Unit)īEP (in dollars) = Fixed Costs / (1 – (Variable Costs as a percentage of Sales)) Fixed costs, such as salaries and rent, and variable costs, such as shipping and sales commissions, influence your BEP. Calculating your BEP is crucial, and there are two ways to do so, based on units or dollars. By understanding your BEP, you can avoid losses, identify trends towards potential losses, change your pricing structure, and reduce variable costs. This KPI represents the point when your sales equal your expenses, resulting in zero income. ProductĬalculate the break-even point in units and in dollars.Every business owner wants to make informed decisions that lead to success, and knowing your break-even point (BEP) is critical in achieving that goal. The calculation procedure and the formulas are discussed via following example: Example: Formulas and Calculation Procedureįollowing information is related to sales mix of product A, B and C.
These are then used to calculate the break-even point for sales mix. This problem is overcome by calculating weighted average contribution margin per unit and contribution margin ratio. Since we have multiple products in sales mix therefore it is most likely that we will be dealing with products with different contribution margin per unit and contribution margin ratios. The calculation method for the break-even point of sales mix is based on the contribution approach method.
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