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 for owners and proprietors. To this end, management determines the break-even point of the company.
This indicator characterizes the moment when the effectiveness of the company (or project) is revealed, since every investor wants to know the time when his investments will start to generate income. The calculation of the break-even point makes it possible for the 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 boundary value when the revenue side is equal to the expenditure side. This state is breakeven, which is very significant for investors and business owners.
The question of how to calculate the break-even point is very relevant today.
Concept
The break-even point is the volume of sales that corresponds to a profit equal to zero. By profit in this case we understand the difference between the revenue and expenditure parts of the company's budget. Profit is zero whenincome is equal to the company's expenses. That is, the break-even point is a situation where the company's income is equal to its expenses.
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 a cornerstone in the process of analyzing the work of the company and developing its strategy.
Determining the break-even point allows the company to understand how much it needs to produce (or sell) in order for the company to work not at a loss, but at 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 also be noted that the break-even indicator itself may change, which is associated with the scale of the company's growth, its turnover and sales volumes, price dynamics and other important factors.
Destination
The value of calculating the break-even point of an enterprise is very large, as it provides the following features:
- resolving the issue of the expediency of investing money in the project;
- identifying problems in the enterprise related to the dynamics of break-even;
- determining the change in the volume of sales and the price of products, that is, identifying the possibilities of how much to change the volume of production when the price changes;
- calculation of the possibility of reducing revenue to such an extent as not to be in the red.
The importance of calculating thisindicator is also provided by the following points:
- the ability to determine the optimal cost of selling goods;
- calculation of the payback period of the project;
- tracking the dynamics of the indicator helps to identify problem areas of the company;
- opportunities for analyzing financial condition.
Calculation conditions
The calculation of the indicator is possible subject to the following initial options:
- The value of variable costs and the price of goods are indicators that are static in time;
- ability to calculate indicators of variable costs determined per unit of output;
- ability to calculate fixed costs;
- linear relationship between variable costs and production volumes;
- the firm's external environment is stable;
- no leftover finished products.
The break-even point and profit are closely related concepts. A firm's profit 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 calculation of the break-even point also depends on the correct choice from the grouping by category.
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 remain virtually unchanged over time or varyslightly.
The main factors that can change fixed costs are as follows:
- firm power dynamics;
- opening (closing) of a new department, workshop;
- dynamics of rent payments;
- inflationary processes, etc.
At the same time, such a factor as a change (growth/decrease) in production and sales volumes does not affect the amount of fixed costs.
Fixed costs include the following categories:
- depreciation;
- salary (basic and additional) for administrative and managerial personnel, 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, along with the dynamics of sales volumes, the amount of variable costs also changes.
The dependence is direct: with the growth of production volumes, the amount of variable costs also increases. When volumes decrease, the amount of expenses also decreases.
It is worth paying special attention to one point: variable costs calculated per unit of production do not change in any way with the dynamics of production volumes, they are called conditionally fixed.
The following categories are included in such expenses:
- costs of materials and raw materials (both main and auxiliary);
- component costs;
- semi-finished products;
- fuel costs;
- expenses on electricity for technological needs;
- wages with deductions for key production workers.
Method of calculation
The literature presents two possible options for calculating the break-even point using formulas: in natural terms and in monetary terms.
To calculate the value in physical units, you need to prepare data on the following indicators:
- final value of fixed costs (FC);
- price per unit of output (goods or services) (P);
- the amount of variable costs per unit of output (PZed).
The calculation is carried out as follows:
TBU=PZ / (C - Pzed).
The result of the calculation is the determination of the critical amount of product sales, which is calculated in natural units (pieces).
Marginal income and its application in calculations
To calculate the break-even point in monetary terms, you need to prepare data on the following indicators:
- sum of total fixed costs (FC);
- total firm revenue (B);
- variable cost per volume (PVb) or per unit of output (Pv)
In this situation, the marginal income value is initially calculated using the formula:
MD=B - PZob, where МД – marginal income, t.r.;
B - company's revenue, t.r.;
PZob - variable volume costs, t.r.
Marginal return can also be determined in terms of a unit of production:
MD=C – Pzed
Next, we determine the marginal income ratio:
KMD=MD / V, where KMD is the marginal income ratio.
Another calculation option:
KMD=MD / C, This option is applicable provided that the contribution margin is calculated based on the price value.
The break-even point and the formula for calculating the indicator in monetary terms looks like this:
TBU=PZ / KMD
According to the results of calculations, we obtain the critical amount of revenue, at which the profit is 0.
Let's calculate the break-even point of the enterprise for different options.
Example of a business venture
As a sample for calculations, let's take a trading shoe store LLC "Shoes". The calculation of the break-even point for such an enterprise is impractical in physical terms due to the large assortment list. In this situation, calculations in monetary terms are used.
Fixed store expenses include:
- rent payments;
- salary wages;
- deductions from wages of salespeople;
- utility costs;
- advertising costs.
The table below shows the main costs of the store LLC "Shoes" for 2017.
Variable and fixed costs of Shoes LLC in 2017:
| Expense item | Amount, R. |
| Permanent | |
| Rent payments | 50000 |
| Sales salary | 150600 |
| Deductions from payroll | 45180 |
| Utility payments | 22000 |
| Advertising costs | 45000 |
| Total fixed costs | 312780 |
| Variables | |
| Product purchase costs | 700000 |
| Total variable costs | 700000 |
Among other inputs:
revenue is 1,500,000 rubles
Calculate margin income:
1,500,000 – 700,000=800,000 rubles
The margin ratio is:
800,000 / 1,500,000=0.533
The break-even point according to the formula will be:
312780 / 0, 533=$586,463
This indicator means that in order for the company to receive zero profit, it is necessary that Shoe LLC sells products for 586,463 rubles. in year. If the amount of sales is higher, then the company will have a profit. Marginal income in this case in the amount of 800,000 rubles. represents the financial strength of the firm. It shows that a store can reduce revenue by a given amount without incurring losses.
Examplemanufacturing company
The break-even point for production has its own calculation features.
In this situation, for example, let's take the company "Start" LLC, which produces industrial (homogeneous) products at approximately equal prices. The price of one product is 500 rubles.
Initial cost data are shown in the table below.
Fixed expenses of Start LLC for 2017:
| Cost item | Amount, R. |
| Factory overheads | 90000 |
| Depreciation | 120000 |
| Salary for AUP | 115000 |
| Utility payments | 25000 |
| Total | 350000 |
Variable expenses of Start LLC for 2017
| Variable cost per unit | Cost, rub. | Production volume, pieces | Amount, R. |
| Material costs | 120 | 1000 | 120000 |
| Semi-finished products | 80 | 1000 | 80000 |
| Salary for basic workers | 75 | 1000 | 75000 |
| Deductions from payroll | 22, 5 | 1000 | 22500 |
| 297, 5 | - | 297500 |
The calculation of the break-even point of products will be as follows:
TBU=350,000 / (500 – 297, 5)=1728 units.
It turns out that Start LLC must produce 1728 units of products in order for the profit to be equal to zero. If the volume exceeds this indicator, the company will receive a profit.
Complicated version
Let's consider a variant when the firm produces several goods. The sequence for calculating the break-even point from the sale of several goods is as follows:
- calculation of marginal income for each product;
- determining the share of marginal income in revenue and its coefficient;
- calculation of TBU.
Fixed cost calculation:
| Product | Proceeds from sales, t.r. | Amount of variable expenses, t.r. | Amount of fixed costs, t.r. |
| 1 | 500 | 120 | 380 |
| 2 | 350 | 116 | |
| 3 | 320 | 89 | |
| Total | 1170 | 325 | 380 |
Variable cost calculation:
| Product | Marginal income, t.r. | Margin Share | Variable cost ratio |
| 1 | 380 | 0, 76 | 0, 24 |
| 2 | 234 | 0, 67 | 0, 33 |
| 3 | 231 | 0, 72 | 0, 28 |
| TOTAL | 845 | 0, 72 | 0, 28 |
Calculation of the average TBU indicator for all types of products:
TBU=380,000 / (1-0, 28)=526 thousand rubles
Thus, the break-even sales volume for the company amounted to 526 thousand rubles
Calculation assumptions
Calculations are made very easily when there is all the necessary information according to the firm. However, there are some nuances:
- price of products, even with an increase in production volumes in the calculations, is fixed and does not change. However, in reality, especially when it comes to a long period of time, this situation is impossible;
- in the calculations, the costs are also constant. However, in reality, with the growth of sales volumes, they grow;
- calculation of TBU implies the sale of goods in full, withoutleftovers;
- TBU value can be calculated for one type of product, the assortment structure should remain constant.
Using the break-even point method, you can easily manage the company's business: if necessary, increase sales, increase the average bill of purchases, change the cost structure, etc.
The main factor in the stability of the company is the level of fixed costs. In the case when this indicator is large, the company needs a high level of turnover to cover them. With low fixed costs and a decrease in revenue, the company will not enter the loss zone. It is this dependence that can be used when managing a company.
Conclusion
The break-even 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 income 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 creditors.
