What is the balance point of profit-even Point?
Break-even Point, known as BEP, or as the principal, is the sales volume or sales of the business when it is operating in a no-loss/no-gain state. In this respect, the total income of the enterprise is exactly the equivalent of the total cost. It is a key financial indicator for measuring business risks and profitability.
Why is the balance of profit and loss analysis essential?
1. Assessment of operational feasibility: By calculating the insured sales, you can make a visual judgement as to whether market demand is sufficient to support your business. If the coverage is much higher than historical sales, it is a reflection of higher business risk.
2. Guidance on pricing strategy: By modelling different unit prices and variable costs, you can observe the movement of the BEP, thus determining the most competitive pricing options.
3. Set sales targets: It can help management to transform abstract “profit goals” into a “marketing task” of the image.
Core formula
- Marginal Contribution = unit selling price - unit change cost
- Marginal contribution rate = (marginal contribution/ unit sale) x 100%
- Units = fixed cost / marginal contribution
- Sales in favour of the original = fixed cost / marginal contribution rate
- Targeted profit sales = (fixed cost + target profit) / marginal contribution
Fixed costs vs. change costs
Fixed Cost (Fixed Costas): refers to costs of industry, such as rental of plant, basic salaries of managers, depreciation of equipment, insurance, etc., that do not change over time with production.
Change cost (Variable Costas): refers to costs that vary in proportion to the increase in production, or decrease in the percentage of the output, such as raw materials expenditure, piecework, packaging fees, sales credits, etc.
How can the balance be reduced?
Declining BEPs means that enterprises are more likely to be profitable and can be achieved by:
- Reduction of fixed expenditure: for example, by optimizing the process to reduce management costs or choosing more flexible office space.
- Optimizing cost structures• Finding cheaper suppliers of raw materials and reducing unit change costs.
- Increase premium capacity• Increasing the price of units through brand upgrading and technological development, thereby increasing marginal contributions.