When you started doing business one of the things you would have considered is Break Even Point. You would want to know when you could take back the invested money in order to make more money.
When you have requested a bank for a loan they would have asked for a forecast. In that forecast they would want to know when your business would break-even. A very common definition of Break-Even is: “The level of sales necessary to cover all variable and fixed expenses and neither make a profit or a loss”.But I believe the definition of Break Even Point (BEP should be “The level of sales necessary to cover all variable and fixed expenses plus an amount of Profit. What is the use of reaching Break Even Point if you are not making profit? You are not running a charity. So please make sure to add a certain amount that is required. This amount will justify the time and effort that you have put in.
So , by lowering the break even volume that is the number of products you need to sell, actually you can increase the ROI (return on Investment). Break Even volume is calculated by dividing Fixed Cost by the Contribution per unit . Contribution per unit = (revenue – variable costs)/Number of units.
Now the three ways to lower BEP:
- Raise Price : raising price will mean more contribution per unit of product and the BEP will be lowered.
- Reduce Fixed Costs – Since Fixed cost is the numerator, reducing it will result in lower BEP.
- Sell complimentary products – This is another way to increase the contribution leading to reduction in BEP.