How to Account for Interest in Break-even Point Calculation?




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Deepti Namjoshi
HR Consultant, India

How to Account for Interest in Break-even Point Calculation?

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?
 
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Arrey Benedict
Management Consultant, Belgium
 

Interest in Break- even Point Calculation

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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