How to calculate the breakeven point: formula

Any entrepreneurial activity requires an assessment of the moment when the enterprise (especially if it has just opened) will be able to cover its costs and begin to make a profit to owners and owners. To this end, management determines the breakeven point of the company.

This indicator characterizes the moment of revealing the effectiveness of the company (or project), since each investor wants to know the time when his investments will start to generate income. Break-even point calculation allows an investor to decide whether to invest or not.

For the profitability of the business and the functioning of the enterprise, management must know exactly the borderline value when the revenue part is equal to the expenditure. This condition is the breakeven, which is very significant for investors and business owners.

The question of how to calculate the breakeven point is very relevant today.

The concept

Break-even point is the sales volume, which corresponds to a profit equal to zero. In this case, profit is understood as the difference between the revenue and expenditure parts of the firm’s budget. Profit is zero in a situation where income is equal to the expenses of the company. That is, the breakeven point is a situation where the company's revenues are equal to its costs.

If we take volumes exceeding this value, then the company makes a profit, if it is not achieved, unprofitable activity is observed. Therefore, this concept is the cornerstone in the process of analyzing the work of the company and developing its strategy.

Determining the breakeven point allows the company to understand how much it takes to produce products (or sell) so that the company works not at a loss, but to zero.

The calculation of the indicator is very important in the process of financial analysis and forecasting the stabilization of the company. In a situation where the value of this indicator is growing, they say that the company has problems with making a profit. It should be noted the possibility of dynamics of the breakeven indicator itself, which is associated with the scale of the company’s growth, its turnover and sales volumes, price dynamics and other important factors.

Appointment

The value of calculating the breakeven point of the enterprise is very large, as it provides the following features:

• the decision on the advisability of investing in the project;
• identification of problems at the enterprise related to break-even dynamics;
• determination of changes in the volume of sales and prices of products, that is, identification of opportunities, how much to change the volume of products when prices change;
• calculation of the possibility of reducing revenue to such an extent that it does not appear to be in the red.

The importance of calculating this indicator is also provided by the following points:

• the ability to determine the optimal cost of sales of goods;
• calculation of the payback period of the project;
• tracking the dynamics of the indicator helps to identify problem areas of the company;
• financial analysis capabilities.

Terms of calculation

Calculation of the indicator is possible subject to the following initial options:

• the value of variable costs and the price of the goods are indicators that are static in time;
• the ability to calculate indicators of variable costs, determined per one unit of production;
• the ability to calculate fixed costs;
• linear relationship between variable costs and production volumes;
• the external environment of the company is stable;
• no residues of finished products.

Break-even point and profit are closely related concepts. The profit of the company is determined by its costs.

The calculation starts from the moment the costs are classified as fixed and variable. A clear distinction is needed. The correct break-even point calculation depends on the right choice from the grouping into categories.

All costs can be classified into two large groups: fixed, variable.

Fixed costs

This category of costs is not dependent on the volume of production and sales of the company. These costs do not change over time or practically do not change significantly.

The main factors under which the fixed costs may change are the following:

• company power dynamics;
• opening (closing) of a new department, workshop;
• dynamics of rental payments;
• inflationary processes, etc.

Moreover, such a factor as a change (increase / decrease) in production and sales does not affect the amount of fixed costs.

The following categories are classified as fixed costs:

• depreciation;
• salaries (basic and additional) for administrative staff together with deductions;
• rent payments, etc.

Variable costs

These items of expenditure differ significantly from the constant main point: a direct dependence on production and sales volumes in the company. That is, together with the dynamics of sales volumes, the amount of variable costs also changes.

The dependence is direct: with an increase in production volumes, the sum of variable costs also increases. With a decrease in volumes, the amount of expenses also decreases.

Particular attention should be paid to one point: variable costs, calculated per unit of output, do not change at all with the dynamics of production volumes, they are called conditionally constant.

These costs include categories:

• the cost of materials and raw materials (both basic and auxiliary);
• component costs;
• semi-finished products;
• fuel costs;
• electricity costs for technological needs;
• wages with deductions for the main production workers.

Calculation Method

The literature presents two possible options for calculating the breakeven point by the formulas: in physical terms and in monetary terms.

To calculate the value in physical units, it is necessary to prepare data for the following indicators:

• total value of fixed costs (PP);
• price per unit of production (product or service) (TS);
• the amount of variable costs that fall on the unit of production (PZed).

The calculation is carried out as follows:

TBU = PZ / (Ts - Pzed).

The result of the calculation is the determination of the critical amount of sales of products, which are calculated in physical units (pieces).

Marginal income and its application in the calculations

To calculate the breakeven point in cash, you need to prepare data for the following indicators:

• the amount of total fixed costs (PP);
• total revenue of the company (B);
• variable costs per volume (PZob) or per unit of output (PZed)

In this situation, the value of marginal income is initially calculated according to the formula:

MD = B - PZob,

where MD - marginal income, t.

In - the company's revenue, t.

- variable costs per volume, i.e.

Marginal income can also be determined through a unit of production:

MD = C - Pzed

Next, we determine the margin income ratio:

KMD = MD / V,

where KMD - margin income ratio.

Another calculation option:

KMD = MD / C,

This option is applicable provided that the marginal income is calculated based on the value of the price.

The break-even point and the formula for calculating the indicator in monetary terms looks like this:

TBU = PZ / KMD

Based on the calculation results, we obtain a critical revenue volume at which profit is 0.

Here are the calculations of the breakeven point of the enterprise for different options.

Trading company example

As a sample for calculations, we will take a shoe store at Shuz LLC. The break-even point calculation for such an enterprise is impractical in kind due to the large assortment list. In this situation, use calculations in monetary terms.

The constant expenses for the store include:

• rent payments;
• salaries of sellers;
• deductions from wages of sellers;
• utility costs;
• advertising costs.

The table below shows the main costs for the store LLC “Shuz” for 2017.

Variable and fixed costs of Shuz LLC in 2017:

Among other input data:

• revenue is 1,500,000 p.

We calculate the marginal income:

1 500 000 - 700 000 = 800 000 p.

Margin income ratio is equal to:

800,000 / 1,500,000 = 0.533

The break-even point according to the formula is:

312780 / 0.533 = 586 463 p.

This figure means that in order for the company to receive zero profit, it is necessary that Shuz LLC sell products worth 586,463 rubles. in year. If the sales amount is higher, then the company will have a profit. Marginal income in the amount of 800 000 p. represents the stock of financial strength of the company. It shows that the store can reduce revenue by this amount and not incur losses.

Production Company Example

The breakeven point for production has its own calculation features.

In this situation, for example, take the company LLC Start, which is engaged in the production of industrial (homogeneous) products at approximately equal prices. The price of one product is 500 rubles.

The initial cost data are shown in the table below.

Fixed expenses of Start LLC for 2017:

Variable expenses of Start LLC for 2017

The calculation of the breakeven point of the product will be as follows:

TBU = 350,000 / (500 - 297.5) = 1728 units.

It turns out that Start LLC must produce 1728 units of products so that profit is zero. If volumes exceed this indicator, the company will profit.

Complicated Option

Consider the option when the company produces several products. The sequence of calculation of the breakeven point from the sale of several products is as follows:

• calculation of marginal income for each product;
• determination of the share of marginal income in revenue and its ratio;
• TBU calculation.

Calculation of fixed costs:

Calculation of variable costs:

Calculation of the average TBU indicator for all types of products:

TBU = 380,000 / (1-0.28) = 526 t.

Thus, the break-even sales volume for the company amounted to 526 tons.

Calculation Assumptions

Calculations are made very easily when there is all the necessary information according to the company. However, there are some nuances:

• the price of products, even with an increase in production in the calculations, is fixed and does not change. However, in reality, especially when it comes to a long period of time, such a situation is impossible;
• in the calculations, the costs are also constant. However, in reality, with increasing sales, they are growing;
• TBU calculation implies the sale of goods in full, without residues;
• TBU value can be calculated for one type of product; the assortment structure must remain constant.

Using the breakeven point method, you can easily manage the company’s business: if necessary, increase sales, increase the average check of purchases, change the cost structure, etc.

The main factor in the company's sustainability is the level of fixed costs. When this indicator is large, the company needs a high level of turnover to cover them. With low fixed costs and lower revenues, the company will not enter the loss zone. It is this dependence that can be used when managing the company.

Conclusion

The breakeven point is a very important indicator for the company, which is used in forecasting production and sales volumes. It makes it possible to determine the ratio of costs and revenues of the company and make decisions on setting the optimal price. The indicator is used in many areas of the company, especially important for business owners, investors and lenders.