Break Event Point for Service Company
Break Even Point (BEP) is point that make company get zero profit. Zero profit makes revenues equal expense.
BEP is important because managers want to know how many quantities that company must sell to avoid loss.
We usually see Break-even point (BEP) used for calculating products or goods, but we rare see BEP used for service company, but It is practical that we can use BEP for service companies such as school, consulting, audit firm etc.
The following formula is for the Break-even point (BEP).
Profit = Revenue – Expense = Q x SP – TFC – TVC = Q x SP – TFC – Q x VC
Profit = 0, so Revenue = Expense = > Q x SP = TFC + Q x VC => Q ( SP – VC) = TFC
- Q ( BEP as unit) = TFC/(SP – VC)
- BEP as dollar = BEP as unit x SP
Q: quantity sold, break even point
SP: selling price per unit
TFC: total fixed cost
TVC : total variable cost
VC: variable cost per unit
Example for school
Assume that ABC school has BBA class, and school fee for BBA is $1,000 per year for a student.
Variable cost for school and teaching is $500 per student. Total fixed costs are $500,000 per year.
- How many students enroll to study that make school neither profit nor loss.
- Calculate break-even point (BEP) as dollar.
1. Number of students
BEP ( No. of students) = 500,000/(1,000-500)=1,000 students
ABC school needs at least 1,000 students to enroll the school or school will lose.
2. BEP ( dollar)
BEP ( dollar) = 1,000 x $1,000=$1,000,000
It is dollar revenue that school should get to avoid loss.
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