When planning to open a business, an entrepreneur must understand how long it will take to cover costs and from what point the income will begin to flow. The break-even point is the point after which the business should become truly profitable. Without determining this point, it is impossible to predict the payback of the project and assess the prospects, so the decision to invest without reasonable forecasts for the development of a particular business is usually not made.
What is the break-even point
The break-even point in the English abbreviation is BEP (break-evenpoint), for convenience we will use this designation. Accepting the truth that profit is the difference between revenues TR (totalrevenue) and expenses TC (totalcost), BEP can be defined as the moment zero profit. BEP can be in monetary or in-kind terms. You need to know this indicator in order to navigate sales volumes to reach zero. In BEP, expenses are always less than income. If the point is crossed, they talk about income and, accordingly, before it is reached, they talk about losses.
A company's BEP needs to be known in order to make informed conclusions about its financial stability. If the BEP value increases, you can be sure that there are problems with profits. The value changes when the enterprise grows with a concomitant increase in turnover, when it enters another sales network, when prices change and when the network is established.
The BEP value needs to be known for:
- Determining the prospects of investing in a project, taking into account the specific sales volume.
- Identifying company problems in connection with temporary BEP changes.
- Calculation of the interdependence of sales volume and the price of the manufactured product.
- Finding out a possible decrease in revenue without the threat of losses if the actual profit received exceeds the estimated one.
Fixed and variable costs
To determine BEP, you need to separate fixed and variable costs.
Fixed costs:
- deductions for depreciation;
- salary of management personnel;
- rent, etc.
Variable costs:
- consumables;
- components;
- fuels and lubricants;
- electricity;
- workers' salaries, etc.
Fixed costs are not affected by production volume and sales level. These costs remain unchanged for a long time, and they can be affected by an increase or decrease in productivity, opening or closing of sites, changes in rent, inflation, etc. The size of variable costs directly depends on the volume of production (sales). As volume increases, variable costs increase. It is important to understand that the costs for each unit of production are conditionally constant and do not depend on the volume of production.
BEP calculation
Break-even is calculated by cost or in physical terms.
1. To calculate BEP in physical terms, the following data is needed:
- FC (fixed cost) – fixed costs for volume.
- P (price) – unit price;
- AVC (average variable cost) – variable costs per unit.
Formula for calculation in physical terms:
BEP = FC / (P − AVC)
2. Calculation of BEP in monetary terms is carried out:
- FC (fixed cost) – fixed costs;
- TR (totalrevnue) – income.
- P (price) – price;
- VC (variable cost) – variable costs per volume or AVC (average variable cost) – variable costs per unit.
First, the contribution margin (MR) portion of total revenue is calculated. The indicator is needed for calculation in monetary terms. Contribution margin is the difference between revenue and variable costs.
The unit price is calculated using the formula
P = TR / Q, where Q is sales volume.
Contribution margin is the difference between unit price and variable costs.
Marginal income ratio:
KMR = MR / TR or (by price): KMR = MR / P
The results from using both formulas will be the same.
The profitability threshold or break-even point is calculated using the formula:
Let's calculate BEP for a clothing store. Taking into account the specifics of the enterprise, we will carry out calculations in monetary terms.
Fixed expenses include:
- rent – 100,000 rubles;
- salespersons' salary – 123,080 rubles;
- deductions from salary (30% – insurance premiums) – 369 20 rub.;
- utility bills - 15,000 rubles;
- advertising – 35,000 rub.
Total: 300,000 rub.
The store's variable costs consist of:
- The average purchase price is 1,000 rubles.
- Planned sales volume, units. – 600.
Total: 600,000 rub.
Marginal income will be:
MR = 2,400,000 − 600,000 = 1,800,000 rub.
MR coefficient:
KMR = 1,800,000 / 2,400,000 = 0.75
Calculate BEP:
BEP = 300,000 / 0.75 = 400,000 rub.
This means that to reach zero profit, the store must sell goods worth 400,000 rubles. Having crossed this mark, the trading enterprise will begin to make a profit. The financial strength of the store is 1,800,000 rubles, i.e., by reducing revenue by this amount, the company will not go into losses. It is much easier to determine the break-even level by using a calculator.
This is the moment when the company will receive zero profit, that is, revenues will completely cover costs.
It plays an important role in performance evaluation investment projects and determining their payback period.
Using the break-even point, an investor can assess the risks when investing money in a proposed business.
It is known that there is a so-called accounting profit, when in the reporting there is a positive balance of sales income, but in reality the enterprise operates at a loss.
After all, every enterprise has a strategic goal to maximize profits, and this cannot be done if you do not use analysis (it is advisable to do this before doing this).
Why is the break-even point calculated?
The break-even point indicator shows the threshold of profitability of an enterprise from the sale of goods or provision of services.
It means the level of price, cost, and other production or marketing costs at which profit is zero.
Calculated in monetary terms and in kind. For clarity, it is depicted graphically.
Reasons for calculation:
- helps determine the critical production level. At the point of minimum sales volume, profit and loss reach zero. In this way, economists find out how much product is needed so as not to make a loss when selling it;
- financial analysis of a company or one of its industries. The calculation of the point will show the state of the enterprise in the context of individual products. In this case, a decision may be made to liquidate its production.
- determination of enterprise sustainability;
- cost planning. It is calculated how the volume of goods sold changes when the price changes;
- change in revenue level;
- definition ;
- identifying bottlenecks in production. That is, those industries in which problems are observed, such as low profitability or loss.
It is important to remember that the break-even level is inextricably linked to profit.
It is calculated as the difference between net revenue and cost of production, and the latter consists of costs.
Calculation of the indicator in dynamics reflects the financial and production growth of the enterprise and will help develop an effective strategy.
Initial data for calculating the indicator
First, let's look at what fixed and variable costs are.
Constant – do not change with an increase/decrease in production volumes. They remain unchanged under any conditions.
Their value fluctuates only depending on changes in the given period.
Fixed costs are considered part of the break-even point model, as are variable costs.
Such costs include:
- . Costs are distributed proportionally over the entire service life;
- rent The premises are rented, as a rule, for a long-term period. Therefore, it is reviewed only after the expiration of the lease agreement, so such costs are considered constant.
- admin personnel;
- some .
Referred to as TFC on a graph or formula. Variable costs directly depend on the output of goods.
In accounting, they can easily be attributed to a specific type of product. For example, costs of materials, fuel, raw materials.
In addition to these two data, it is necessary to collect the following information:
- P. - unit price;
- Q. - sales volume in kind;
- B. - revenue from sales;
- TFC. – fixed costs;
- TVC – variable costs.
In the accounting of a single enterprise, costs may be divided differently than in other companies.
It depends on the specifics of the activity. After all, all expenses are classified conditionally.
Even fixed costs vary different period time.
Calculation method
The formula for calculating in monetary terms is mathematically as follows: BEP=FC/KMR
- Where: FC – fixed costs;
- KMR – marginal income (ratio). Formula: KMR=MR/TR or KMR=MR/Р.
- Here: MR – marginal income, TR – revenue, P – price. We do not know the marginal income, so we calculate ego as the difference between revenue and variable costs MR=TR-VC.
It is the marginal income ratio and fixed costs that are the two values that you need to know in order to calculate the break-even point in monetary terms.
This indicator is also called the profitability threshold.
Thus, you can find out minimum quantity sold products.
Formula: BEP=FC/(P-AVC).
Important: both formulas will show the break-even point, only the first option illustrates the critical cost ratio for obtaining zero profit, and the second is the minimum level of production.
How to calculate the break-even point for production
To do this, consider the calculation using the example of sugar beet production. Let's start in order.
First, you need to take reports from which you can find out which group certain costs belong to or divide them yourself.
Often the same items can be both constant and variable. Therefore, we will divide them in a ratio of 30/70, respectively.
Fixed and variable costs
| Cost items | Sum |
|---|---|
| Fixed costs | |
| Wages | 910* |
| Social charges | 336 |
| General production expenses | 8467 |
| Sales costs | 1566 |
| Preparation and development of production | 8640 |
| 8361 | |
| Administrative costs | 3319 |
| Total fixed costs | 31600 |
| Variable costs | |
| Costs for harvesting sugar beets | 6909 |
| Raw material costs | 140108 |
| Other materials | 19229 |
| Fuel and energy for technological purposes | 102924 |
| Wages | 3642 |
| Social charges | 1344 |
| Retention of operating equipment | 3583 |
| Sales costs | 1669 |
| Total variable costs | 279408 |
| Variable costs per 1 ton of beets, rub. | 3621 |
| Price of 1 ton of beets including VAT, rub. | 5613 |
| Price of 1 ton of beets without VAT, rub. | 4677,69 |
*The numbers in the table are not real, but chosen arbitrarily, only to demonstrate the calculation of indicators.
We calculate the break-even point in physical terms.
This is more relevant for manufacturing enterprises than for companies engaged in sales finished products.
Formula: BEP=FC/(P-AVC).
You will get the following results:
Indicator results
| Break-even point, t | 29901 |
| Sugar from own raw materials, t | 29901 |
| Sugar from purchased raw materials, t | 47265 |
| Total, t | 77166 |
Based on the table data, we will construct a graph.
On the graph, the red line is revenue, the blue line is fixed costs, and the purple line is total costs.
- The following results were obtained: sugar from own raw materials is 29,901 tons, the total production volume is 77,166 tons.
- Thus, the production of sugar from purchased raw materials is 77166-29901 = 47265 tons.
- Then the need for raw materials of own production: 29901/77166 * 100 = 39%.
How to calculate a store's break-even point?
To do this, you need a formula for calculating the break-even point in monetary terms.
An example of calculating an indicator for a store is as follows:
The efficiency of the store will be shown by the difference between the current turnover and this indicator at the break-even point.
The main cost items for the store are:
- wages;
- rent;
- other costs.
In this example, they are 100,000 thousand rubles, 130,000 thousand rubles. and 10,000 thousand rubles. respectively.
Total costs – 240,000 thousand rubles. The percentage of markup on goods is 29%.
Thus, the level of turnover at the break-even point is determined.
Depends on the economic planning department. Always displayed in the business plan in .
Break-even of a new project
This can be done manually, but it is better to use Excel for this. It will be enough to enter data or export it from other tables.
Consider the following example:
Project input data
| Fixed costs (Zpost.), rub. | 200 |
| Variable costs (Zper.), rub. | 50 |
| Price (income) from 1 unit. products (P), r. | 120 |
Based on the source data, we write the formula into the cells.
In total, we get many options, one of which has zero profit.
Thus, we calculate the break-even point of the project. Next we build a diagram.
To do this, you need to do a marketing analysis of the market, find out the price, calculate planned indicators, all costs, and only then proceed to the break-even point.
Financial strength margin
The break-even point and the margin of financial strength are interrelated indicators.
The margin of financial strength is an indicator of the relationship between the actual sales volume and its level at the break-even point.
When it is high, the enterprise is considered sustainable.
Important: The margin of financial stability is the critical point to which sales revenue can be reduced.
If this indicator falls below, then the company begins to make a loss. Calculated as a percentage.
To find out the margin of financial stability, you need to subtract the critical value from the total revenue.
The growth of this indicator can be achieved by reducing costs, which is realistic in the following cases:
- the firm is located at a point where production and sales volumes are the same;
- more is produced than is sold;
- more is sold than produced.
When an enterprise cannot sell manufactured goods, then they speak of a loss of profit and the stock decreases.
Important: in the opposite situation, the indicator will not be true. After all, it increases, but the costs of purchasing products from contractors also increase.
Thanks to the analysis of financial stability, it is possible to judge financial situation enterprises as a whole.
In simple words, we can say that the calculation of this indicator, especially its graphical representation, shows how far production and sales of products are from the break-even point.
Economists believe that the margin of financial stability more accurately characterizes the financial condition of an enterprise.
Please note that the safety margin can rapidly change its value, depending on the distance between this indicator and the break-even point.
It also changes in monetary and physical terms and is calculated as a coefficient.
Results
For enterprises conducting commercial activities, the calculation of the indicator is key to determining the level of the cost recovery threshold.
It also helps to find the optimal volume of sales or production, set a price level that will starting point to increase targets and further generate profits.
The more accurately the costs are distributed, the more correct the result will be.
In real conditions, the classic formula may not work, especially if it concerns stores or enterprises specializing in the production of polyproducts, that is, with a large assortment, the break-even point for each product will be different.
It is calculated to see how the financial results(profit and profitability) of production or sales with an increase/decrease in production.
Using this indicator, you can maximize profits, since critical production volumes will be known.
How to calculate the break-even point
The profitability threshold, or break-even point, is the volume of products/services sold, upon reaching which the company covers all its expenses, but does not yet have a profit. Using this indicator, you can calculate whether the chosen methods of production growth are suitable for the enterprise and how sustainable the course of development is.
The last parameter allows you to record the moment of financial stability, that is, when the sales volume exceeds the minimum profitability. Next, the term “break-even point” and methods for calculating it will be discussed in detail.
What is the break-even point
The break-even point is the volume of sold products/services at which the resulting profit (not to be confused with income) goes from a negative value to zero.
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Profit is calculated by deducting all expenses from the company's income. There are two types of break-even point:
- in kind;
- in monetary terms.
The break-even point is determined to establish the quantity of products/services with the sale of which income and expenses will become equal. Naturally, this applies to a situation where initially expenses were greater than income. As a result, after exceeding the break-even point, the business becomes profitable. In contrast to this state, the business operates in the negative until the equilibrium ratio has not yet been achieved in the company.
The break-even point shows how stable the company's financial position is. And if this value grows, then this is a sign that the company has difficulties in generating income.
At the same time, the break-even point is not fixed; its data changes in relation to the growth of the enterprise. And its value is influenced by many factors - growth in trade turnover, opening of new branches, changes in pricing, etc.
The break-even point, in turn, affects a number of positions in the company.
- If this indicator is calculated correctly, it can be seen whether it is reasonable to invest in the project given the current state of finances.
- This parameter identifies problems in the company that affect changes in its value.
- When establishing the break-even point and the volume of sales required by the company, it becomes clear how much it is necessary to increase or decrease the quantity of products sold, the scale of production, subject to a revision of their cost. In the opposite situation, it is possible, on the contrary, to identify the impact of changes in production volume on price formation.
- The break-even point shows to what minimum limit the company's profit can be reduced, but at the same time still maintain positive work, without losses.
A graph that allows you to clearly see the appearance of the break-even point
Expert opinion
Correct 6 mistakes that prevent your company from increasing profits by the end of the year
Oleg Braginsky,
founder of the School of Troubleshooters, director of the Braginsky Bureau
After half the year has passed, interim results are usually summed up and an analysis of the company’s work, its achievements and failures is carried out. We must remember that there are still six months for profits to grow and, at the end of the year, to be profitable. But there are some mistakes or incorrect actions that can prevent this from happening. The main ones can be seen in the checklist (see appendix), and the 6 main mistakes are as follows.
Mistake 1. Annoying monotonous actions.
A company can constantly do the same things - find customers only through the sales funnel, not listen to customers to create a more customer-friendly atmosphere, continue to interact with consumers through different channels instead of creating a unified one. At the same time, all departments are separated, each working on its own - advertising, service, and sales.
For example, in the middle of winter, a buyer came to one of the agricultural holdings on the b2b market to purchase fertilizer. The head of the enterprise, in the process of communicating with a client, who turned out to be the director of a state farm, learned that the latter got to the holding’s website thanks to the Internet. He made the purchase, and after that the marketing specialists of the agricultural holding began to attack him regularly, sending emails and communications over the network and offering tools, fertilizers, or seedlings. The client did not like this, it caused irritation, since unnecessary goods were offered, and fertilizers were offered at the wrong time. Marketers had to take into account the information received from customers, make advertising targeted and retain this customer.
Clients do not like it when the same identical actions are performed against them with enviable regularity. To prevent this from happening to you, over the next six months actively communicate with customers at all stages of cooperation. Otherwise, your customers will go to your competitors.
A good solution would be to use Client Journey Map (CJM). McKinsey claims that B2B firms using CJM experience a 10% increase in profits. CJM helps to look at the process through the eyes of the buyer, to outline and apply the customer experience. To do this, perform the following analysis:
- marketing channels that the client used when he first contacted your company;
- what exactly the person liked about the site;
- what the customer asked you before making a purchase;
- what products, services, what promotions are of interest to the client;
- what did not suit the customer during the purchase, what objections did you encounter.
Client Journey Map translated from English is called a client journey map and is a technology in the field of marketing that allows you to make working with consumers as simple as possible, increase their loyalty to the company, and help them interact with your company.
To obtain the data necessary to implement all of the above, your employees must constantly note all the moments and processes of a client’s contact with the company. To do this, you should install a CRM system, set up a website and all communication technologies:
- record all information about clients that is available;
- write down in the scripts the questions that the sales employee should ask first-time applicants;
- combine data about what steps a customer takes on your website with the actions of salespeople working with customers coming from the sales funnel.
This way, you can see the user's journey from their first visit to making a purchase. It is worth breaking down customers into sectors depending on how similar their behavior is. And for each group, draw up a map, best in the form of a diagram or graph, which will show all the moments of contact between customers and your company and their response actions. In the future, the information obtained can be used for clients with similar behavior.
This method will allow you to combine the efforts of different departments of your company, because with the joint activities of the marketing and sales departments and their use of complete information, the results of work will only improve.
Mistake 2. Insufficient detail in the buyer persona.
Customers in companies are usually divided into existing, former and new. But more detailed differentiation is not carried out, plus this principle will not apply to sellers, but in vain. Consumer behavior differs not only according to the specified criteria, but also depending on the region in which they live, on which manager they communicate with, and at what stage of the purchase they are at. And the same criteria apply to sellers. Taking these nuances into account will help maintain customer loyalty and improve service.
To solve this problem, it is worth starting from the scope of your company’s activities and its mission. When setting a goal to increase sales in certain territories, it is advisable to detail the list of clients according to the following parameters:
- their location;
- what kind of purchases they make in this area;
- Which sellers are they most willing to contact and make purchases with?
This will make it clear what the client looks like in a particular region. And based on this portrait, potential buyers can be offered exactly the products that are most likely to interest them. At the same time, it is worth assigning to the client exactly the manager whom he sympathizes with, because this will help increase sales. In this case, the client will see that you have high-quality service and that he is valued in your company.
If the company’s current goal is to improve the work of sales managers, then the following approach can be used. Specialists should be divided into groups. For example, some are better at targeting male customers, while others are better at targeting female customers. To organize the work, incoming calls must be addressed to the administrator, who will distribute them to the most suitable sellers depending on the gender of consumers.
Taking into account exactly this information allows you to retain customers and increase sales. Therefore, it is necessary to analyze data on the behavior of buyers and sellers and choose the right managers to work with a particular customer.
Mistake 3. Not being interested in the opinions of customers.
When creating new types of products/services, a company usually focuses on its own views, and not on the wishes of customers or their needs.
That is, in most cases, no one asks clients for their opinions or listens to the feedback they voice. As a result, the company produces products that are not in demand and are inconvenient for customers. It is imperative to listen to the wishes of large clients. Let there be at least one full meeting with your most important customers.
A solution might be to invite your highest-earning clients to a meeting of sorts at least once a year. If this year you have not yet collected the opinions and feedback of your customers for analysis, then do it as quickly as possible. As an option, you should organize a business weekend at a hotel in the city or with a trip somewhere, have a buffet and discuss your products and services with guests, ask them to evaluate your company’s service, business development, find out their opinion about the products that you are planning release. At such a meeting you will be able to find out the following information:
- what improvements the company needs;
- what changes to make in goods being prepared for release;
- how necessary are the products already on the market, etc.
You can get this information during regular customer surveys, but the fact is that large customers like to feel appreciated and receive attention. Therefore, it is easier to achieve maximum loyalty from them by showing that their opinion as experts is important to you.
Mistake 4: Retaining customers who are no longer valuable.
Often in times of crisis, companies strive to retain any customers, despite the fact that they do not make a profit. Or, on the contrary, they are trying to attract new customers without trying to retain the old ones. However, the flow of customers requires constant attention on your part. It is worth starting to work according to the following scheme - keep profitable clients, and if they leave, then return them, and delete unnecessary ones. Before the end of the year, you need to edit your customer base according to this principle.
The solution is to retain those consumers who regularly buy your products, who have a loyal attitude towards your company and who advocate for your brand. The customer base should be divided into parts, highlighting the amount of the check, the frequency of purchases, the presence of debt or its absence to your company.
It is worth stopping to retain those customers whose check amount and, therefore, the margin are insignificant, even if they make purchases frequently, or those who contact you very rarely. To do this, you can change the sales conditions to be more profitable for the company. For example, increase the average purchase amount. Or change the minimum order conditions from one product to several. Loyal customers will accept these conditions, and the rest will drop out.
But if you see that customers are leaving large quantities or that you have lost your best clients, then the situation needs to be analyzed. It’s worth calling buyers from the b2b sector to find out the reasons for their dissatisfaction. If it suddenly turns out that your best clients are now working with a competitor, ask why they left and what you are missing. This question can be asked directly to customers, or you can purchase a competitor’s product for comparison. The b2b sphere allows you to return lost customers using Internet tools - mailings to email, organizing surveys, notifications about discounts and promotions, etc. You just need to focus on attracting buyers who can bring profit and not be useless.
Mistake 5. Linking managers to clients.
Managers in the b2b sector usually work with their own client base. At the same time, customers do not like it when the seller changes. And managers act according to an already established scheme, often forgetting to offer new services or products. That is, you pay them for simply serving a regular customer.
To solve this problem, you can analyze the work of sellers over the past six months. And if it is clear that the client is buying the same thing and for the same amount as always, then assign another manager to him. Or you can motivate your employees by tying the receipt of a cash bonus to their performance results. In this case, understanding that his remuneration depends on the amount spent by the buyer and on the quantity of goods sold, the manager will make every effort.
Mistake 6: Content is unattractive to readers.
Today, many companies use social media - blogs, networks, and start their own channel on YouTube. But at the same time, the content posted by marketers is boring and uninteresting - ordinary reports, dry articles, speeches of directors, etc. That is social media are used formally, without the goal of attracting customers.
To solve this problem, you need to create interesting and non-standard content in order to get noticed. In this case, you must adhere to three rules.
- Management should not appear on social networks. Subscribers already subconsciously associate a speech or article from the director with boring content. And they need interesting and lively material to forward to their friends. Therefore, the best content would be to post photos, entertaining and educational information.
- Present your company's products or services in a unique way, from an interesting angle. You can show the production process or some unusual approach to using products. It is best to come up with at least ten such ways.
- Hire actors to produce interesting video content. Although it is more expensive, the result is worth it. Actors will be able to talk more convincingly about a company or product than ordinary employees; they will be able to convey to the audience the emotions of owning the products. Plus, such content will not only be educational, but also entertaining; it will be constantly “liked” and “shared,” especially by fans of the actors and their subscribers.
It is known that the production of products implies investment in its production and sale. Every entrepreneur, intending to create good, pursues the goal of making a profit from the sale of goods/services. The break-even chart helps to see in value and physical terms the revenue and volume of production at which the profit is zero, but all costs have already been covered. Accordingly, having crossed the break-even point, each subsequent unit of good sold begins to bring profit to the enterprise.
Data for the graph
To draw up sequential actions and get an answer to the question: “How to build a break-even chart?” it requires an understanding of all the components needed to create a functional dependency.
All the company's costs for selling products are gross costs. Dividing costs into fixed and variable allows you to plan profits and is the basis for determining the critical volume.
Rent of premises, insurance premiums, depreciation of equipment, wages, management - these are the components of fixed costs. They are united by one condition: all listed expenses are paid regardless of production volumes.
The purchase of raw materials, transportation costs, and remuneration of production personnel are elements of variable costs, the size of which is determined by the volume of goods produced.
Revenue is also the initial information for finding the break-even point and is expressed as the product of sales volume and price.
Analytical method
There are several ways to determine the critical volume. The break-even point can also be found using the analytical method, that is, through a formula. In this case, a schedule is not required.
Profit = Revenue – (Fixed expenses + Variable expenses * Volume)
The determination of break-even is carried out under the condition that the profit is zero. Revenue is the product of sales volume and price. This results in a new expression:
0 = Volume*Price – (Fixed costs + Variables * Volume),
After elementary mathematical procedures, the output is the formula:
Volume = Fixed costs / (Price – Variable costs).
After substituting the initial data into the resulting expression, the volume is determined that covers all the costs of the good being sold. You can go from the opposite, setting the profit not to zero, but to the target one, that is, the one that the entrepreneur plans to receive, and find the volume of production.
Graphical method
An economic tool such as a break-even chart can predict the main performance indicators of an enterprise, taking into account constant market conditions. Basic steps:
- The dependence of sales volumes on revenue and costs is constructed, where the X axis reflects data on volume in physical terms, and the Y axis shows revenue and costs in monetary terms.
- A straight line is constructed in the resulting system, parallel to the X axis and corresponding to fixed costs.
- The coordinates corresponding to variable costs are plotted. The straight line goes up and starts from zero.
- The straight line of gross costs is plotted. It is parallel to the variables and originates along the ordinate axis from the point from which the construction of fixed costs began.
- Construction in the system (X, Y) of a straight line characterizing the revenue of the analyzed period. Revenue is calculated on the condition that the price of products does not change during this period and output is produced evenly.
The intersection of direct revenues and gross expenses projected on the X-axis is the desired value - the break-even point. An example graph will be discussed below.
Example: how to build a break-even chart?
An example of constructing a functional relationship between sales volumes and revenues and costs will be produced using the Excel program.
The first thing you need to do is consolidate data on revenue, costs and sales volumes into a single table.
Next, you should call the “Graph with Markers” function through the toolbar using the “Insert” tab. An empty window will appear; right-click on the data range, which includes the cells of the entire table. The X-axis label changes through the selection of data related to the output volume. After that, in the left column of the “Select data source” window, you can delete the output volume, since it coincides with the X-axis. An example is shown in the figure.
If we project the point of intersection of direct revenues and gross costs onto the x-axis, then the volume of approximately 400 units is clearly determined, which characterizes the break-even of the enterprise. That is, having sold over 400 units of products, the company begins to operate in profit, receiving revenue.
Example using formula
The initial task data is taken from a table in Excel. It is known that production is cyclical and amounts to 150 units. The output corresponds to: fixed costs - 20,000 monetary units; variable expenses – 6000 den. units; revenue – 13,500 den. units It is necessary to calculate break-even.
- Determination of variable costs for the production of one unit: 6000 / 150 = 40 den. units
- Price of one sold good: 13,500 / 150 = 90 den. units
- In physical terms, the critical volume is: 20,000 / (90 - 40) = 400 units.
- In value terms, or revenue for this volume: 400 * 90 = 36,000 den. units
The break-even schedule and formula led to a unified solution to the problem - determining the minimum production volume that covers the cost of production. Answer: 400 units must be produced in order to cover all costs, the revenue will be 36,000.00 den. units
Limitations and conditions of construction
The simplicity of estimating the level of sales at which the costs of selling products are reimbursed is achieved through a number of assumptions made for the availability of the model. It is believed that production and market conditions are ideal (which is far from reality). The following conditions are accepted:
- Linear relationship between output and costs.
- The entire volume produced is equal to the volume sold. There are no stocks of finished products.
- Product prices do not change, and neither do variable costs.
- No capital costs associated with purchasing equipment and starting production.
- A specific time period is adopted during which the amount of fixed costs does not change.
Due to the above conditions, the break-even point, the example of which was considered, is considered a theoretical value in the projection of the classical model. In practice, calculations for multi-item production are much more complicated.
Disadvantages of the model
- Sales volume is equal to production volume and both quantities change linearly. Not taken into account: buyer behavior, new competitors, seasonality of release, that is, all conditions affecting demand. New technologies, equipment, innovations and others are also not taken into account when calculating production volumes.
- Finding a break-even position is applicable for markets with stable demand and low levels of competition.
- Inflation, which may affect the cost of raw materials and rent, is not taken into account when establishing one product price for the period of the break-even analysis.
- The model is inappropriate for use by small businesses whose product sales are unstable.
Practical use of the break-even point
After enterprise specialists, economists and analysts have made calculations and built a break-even chart, external and internal users draw information to make decisions about further development companies and investments.
Main purposes of using the model:
- Calculation of product prices.
- Determining the volume of output that ensures the profitability of the enterprise.
- Determination of the level of solvency and financial reliability. The farther the output is from the break-even point, the higher the margin of financial strength.
- Investors and creditors - assessment of the development efficiency and solvency of the company.