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How to Account for Interest in Break-even Point Calculation?
Deepti Namjoshi, HR Consultant, India, Member
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Hi, I am clueless as to how to calculate BEP when other operating expenses such as interest are involved. How is interest considered in the formula for BEP calculation? (...) Read more? Sign up for free
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Interest in Break- even Point Calculation
Arrey Benedict, Management Consultant, Belgium, Member
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Please my dear colleague, let me first of all repeat to you the formula to compute the BEP:
BEP = TFC / (SUP - VCUP)
Which means Total Fixed Cost divided by the Sales Price per Unit minus the Variable Cost per Unit.
Further cost analysis states that Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC).
- Normally all cost accruing from interest can be categorised under Fixed Costs, because investments on loans, mud-gages and depreciations, (which might generate interest to be paid) mostly constitute long-term criteria (of more than one year). So this automatically categorises all forms of interest costs under fixed expenditure or cost. Therefore calculating Break-Even-Point under an "interest payable" circumstance augment our fixed costs column.
- Nevertheless, all interests payable with a short term characteristic (less than 1 year) are instead to be categorised under variable costs.
Hope this would help your understanding. Thanks.
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