Break-Even Point (BEP) in sales

Break-Even Point in Sales

The break-even point in sales is a situation in which a company has no profits or losses or otherwise, is the sales level which makes zero profit. Any sale, above the break-even point represents a company's profit.
To calculate the break-even point of a company with multiple product lines, we use, as a mean to simplify, the concept of contribution margin (CM) rather than the unit contribution margin.
The contribution margin is the difference in value or percentage, between the sales and the sum of the direct variable cost and variable expenses and shows the revenue contribution to cover fixed costs and expenses.
See example:
Sales = 2,500.00
Variables cost and expense = 1,230.00
Fixed cost and expense = 1,000.00
Contribution margin value = 1,270.00
Contribution margin in percentage = 50.80 %
Break-Even Point in sales = $1,968.50
For a company, in the worst economic and financial scenarios, the contribution margin should be at least, sufficient to cover the fixed costs and expenses.
In the cost accounting, the costs are classifieds in:
a) Fixed costs - are those that do not depend on sales volume. E.g. rent, depreciation, interest, office expenses etc. It is known however that these costs are not fixed forever and when placed in the graph mode they vary by steps, in the time.
b) Variable costs - are those who depend on sales volume; e.g. raw materials, direct labor, etc.
c) Semi-fixed or semi-variable costs - are those composed of a combination of a fixed part that is independent of production volume and other part variable that changes according to the scale of production.
d) Direct costs - are those that are directly associated with the cost of the product; e.g. raw materials and labor used in production.
e) Indirect costs - are those costs are directly associated with the product. They are attributable by criteria allocation; e.g., factory rents factory supervision etc.
The analysis of the break-even point helps prevent losses, facilitating decision making from its elements, to the possible changes, according to the market conditions.
In the market difficulties, remember that, the higher the break-even point, the greater the effort to maintain the satisfactory sales volume.
Some reasons for the increase in break-even point:
a) Reducing the margin in contributing;
b) Increase in fixed costs;
c) Elevation in the variable costs and expenses without a counterpart in sales.
The Safety Margin is an indicator that tells how much sales can decrease before reaching the losses.
For the current sales, or budgeted, there are two ways to calculate the margin of safety: one, in values and the other, as percentage.
The formulas involved in the calculation are as follows:
1) Contribution Margin (CM) = Sales Revenue - Variable Costs;
2) CM Ratio = Contribution Margin / Sales;
3) Break-even point in sales = Fixed Cost / (1 - (variable cost / sales));
4) Safety Margin = Sales - Break-even point.
5) Safety Margin in percentage = (Sales - Break-even point) / Sales.
How to calculate the break-even point in sales.

Break-Even Point in Sales

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