home > Control > The break-even point of a project is also called the threshold. Break-even point: calculation formulas and methods of control. Determination of the break-even point


The break-even point of a project is also called the threshold. Break-even point: calculation formulas and methods of control. Determination of the break-even point




The break-even point is a formula for success, a kind of magic point, after passing which you can say with relief that you "survived". I hope everyone calculated it, and not just rely on luck ...

The success of any company is measured by the size and growth of profits. Profit growth is naturally associated with an increase in sales or production volumes.

There is, perhaps, no such amount of profit and sales, having reached which, it is possible to say: “That's enough, no more is needed.” The “appetites” of the company grow as it develops: first we master the native region, then the neighboring ones, then the country to the very outskirts, and, finally, we have (hooray!) world market sites. And at any of these stages, the company is driven by a logical desire to sell as many products as possible and get the maximum profit. But for its successful development, it is necessary not only to calculate how much it will earn, but also to clearly understand what the smallest sales volume is needed for break-even work.

Break even point - what is it?

Making a profit means selling so many products to compensate for all the costs incurred and after that still have some kind of “useful balance”.

  • An optimist, when planning a profit, will ask the question: “How much does it take to sell in order to earn a good profit?”
  • The pessimist will ask more cautiously: “How much does it take to sell in order not to get stuck in debt and not burn out?”

These questions come together at one point - in an attempt to determine the amount of sales below which the company will begin to experience financial losses, and above which it will begin to earn. This minimum possible volume of sales, covering all the costs of the company for the production and sale of goods, which does not bring any losses or profits, is called the break-even point.

The position of the break-even point for the business owner or investor plays a crucial role. After all, you need to know exactly when the project will start to pay off, and whether it will pay off at all, what will be the level of risk when investing Money.

The break-even point of a business is such a volume of sales when the entrepreneur's profit "passes" through zero, and he begins to make a profit, that is, income finally begins to exceed expenses. It is measured in physical terms - pieces, tons or liters, or in monetary terms - rubles.

The break-even point calculation shows how much product needs to be sold or how much work needs to be done in order for income to begin to cover expenses. When passing through the break-even point, the company finally begins to receive net income, and until it is reached, it operates at a loss.

Constant control of the break-even point is important for calculating the financial stability of the enterprise. For example, the growth of its value indicates that the company has problems that prevent it from receiving the necessary profit. In addition, changes in prices, turnover, enterprise growth and many other factors do not contribute to its stable fixation.

    Determining the company's break-even point makes it possible to:
  • to understand whether it is possible to invest in this project funds, money, by calculating the time and sales volume when income exceeds expenses.
  • identify problems in the company if the break-even point began to increase over time;
  • calculate the amount of the required change in sales volume when the price of the goods changes and vice versa, without incurring losses;
  • determine how much it is possible to reduce revenue in a competitive struggle so as not to remain “in the red”;
  • in the event of a decrease in the value of the break-even point, determine what helped this and direct efforts to consolidate the result.

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Break even- a financial indicator, the value of which determines the required sales volume for the stable and operation of the enterprise without making losses and profits.

The economic meaning of the break-even point

In fact, the break-even point is the so-called critical production volume. When the break-even point is reached, the profit as well as the losses are equal to zero.
The break-even point is an important value in determining the financial position of a company. The excess of production and sales volumes above the break-even point determines the financial stability of the company.

Algorithm for calculating the break-even point

To calculate the break-even point, we need to divide the costs by nature:

  • Fixed costs - production costs that do not depend on production volumes (sales volumes).
  • Variable costs are costs that increase with each additionally produced (additionally sold) unit of output.

Consider the following notation:


Vyr - revenue
Real - sales (volume, pcs.)
PostZ - fixed costs
PerZ - variable costs
Price - price
ACV - average variable costs
TB - breakeven point
TBnat - break-even point in physical terms (units of production, pcs.)

The formula for calculating the break-even point (in monetary terms):

TB \u003d Vyr * PostZ / (Vyr - PerZ)

The formula for calculating the break-even point (in physical terms):

TBnat \u003d PostZ / (Price - SperZ)

Break-even point calculation example

Initial data:

Ext = 100,000
Real = 50
PostZ = 15,000
PerZ = 25,000

Calculated data:

Price = Vyr / Real = 100,000 / 50 = 2,000
SperZ = PerZ / Real = 25000 / 50 = 500

TB\u003d Ext * PostZ / (Ext - PerZ) \u003d 100,000 * 15,000 / (100,000 - 25,000) \u003d 20000 rubles.
TBnat= PostZ / (Price - SperZ) = 15,000 / (2000-500) = 10 pieces.

The break-even point is shown on the chart at the intersection of the gross cost line with the revenue line. At this point, the company covers all costs and receives zero profit.

The lines of fixed and variable costs are shown on the graph for reference, in order to see when and how one or another type of cost affects the amount of gross costs.

In a general sense, the graph reflects the change in all previously described indicators (revenue, fixed and variable, as well as gross costs) depending on production volumes (horizontal percentage scale).

Break Even Point Calculation in Excel (with Graph!)

Using MS Excel and our calculation table, you can quickly and visually calculate the break-even point and build a break-even point chart. You will need to enter only 4 initial values, the table will calculate the rest!

The break-even point is the amount of sales (in quantitative or monetary terms) at which the company operates at zero. With an increase in sales relative to this point, the company will have a profit, and with a decrease, a loss.

What is she for?

This indicator allows you to understand the following already at the planning stage:

  • Is it worth investing at current product prices, cost and fixed costs?
  • How much do you need to increase sales without changing prices, production costs and fixed costs, so as not to incur losses
  • How much it is necessary to sell products for the company to work in plus if one or more of the indicators changes: the price of products, the cost of production, fixed costs of management or production.

Calculation formula

The break-even point in physical terms (pieces, tons, liters, etc.) is calculated by the formula:

BEP (nat.) = FС / (P - AVC), where

  • BEP (break-evenpoint) - breakeven point
  • FC (Fixed costs) - fixed costs
  • AVC (average variable cost) - average variable costs

We note right away that (P - AVC) is, depending on the business, either marginal profit (if this is production) or a margin on goods (if the calculation is done for a store or wholesale trade).

If we want to find the break-even point in monetary terms, then there are two calculation options:

  1. Find the break-even point in physical terms and multiply it by the price of the product
    BEP (den.) = P * BEP (nat.)
  2. Multiply by the price the whole formula for calculating the break-even point. The result is the following formula:
    BEP (den.) = P * FC / (P - AVC)

Calculation example for a store

Let's take a simplified situation as an example. The store sells one product - bread at a price of 20 rubles per piece. The store purchases this bread at the factory at a price of 15 rubles per piece. Store fixed costs:

  • The seller's salary is 20,000 rubles. + social contributions (34.2%)
  • Room rental - 30,000 rubles.
  • Utility expenses - 5,000 rubles.

In our example, P = 20 rubles, AVC = 15 rubles, FC = 20,000 * 1.342 + 30,000 + 5,000 = 61,840 rubles.

Substituting these numbers into the formula, we get the following break-even point value in physical terms:

BEP (natural) = 61,840 / (20 - 15) = 12,368

If we want to find the break-even point in monetary terms, then we simply multiply the resulting volume by the price of the product:

BEP (den.) \u003d 12,368 * 20 \u003d 247,360 rubles.

Calculation example for a manufacturing plant

For greater clarity, let's calculate the break-even point at a conditional bakery that supplies bread to outlets cities.

  • The price of bread is 15 rubles.
  • The cost of production for 1 piece: flour - 7 rubles, water - 3 rubles, packaging - 1 rub.
  • General expenses: salary - 50,000 rubles. + deductions (34.2%), depreciation - 30,000 rubles, repair of equipment and premises - 40,000 rubles.

Thus, we get the following values ​​of indicators:

  • P = 15 rubles
  • AVC \u003d 7 + 3 + 1 \u003d 11 rubles.
  • FC = 50,000 * 1.342 + 30,000 + 40,000 = 137,100

The break-even point in physical terms will be equal to:

BEP (nat.) \u003d FС / (P - AVC) \u003d 137 100 / (15 - 11) \u003d 34 275 pieces,

in monetary terms:

BEP (den.) \u003d P * BEP (nat.) \u003d 15 * 34,275 \u003d 514,125 rubles.

The nuances of the calculation

  1. Unfortunately, the above formula for calculating the break-even point works very well for an enterprise that produces or sells only one product. If your company manufactures several types of products, then the weighted average price of all products and the weighted average cost of all products should be used as the product price and cost.
    Thus, if we, for example, have two products (a loaf and a loaf) and their prices, cost and share in the sales volume are as follows:
  1. Average variable costs include all costs that are linearly dependent on the volume of production. So, for example, if you have wage production workers directly depends on production volumes (for example, 5 rubles / piece or 5% of revenue), then it is necessary to calculate this cost per unit of production and add it to AVC. In addition, do not forget that taxes on this salary also need to be considered as variable expenses.
    For example, a bakery produces bread and sells it at a price of 20 rubles / kg, and the variable costs for one loaf are as follows: 5 rubles. for flour, 3 rubles. for water, 1 rub. for packaging, 5% of revenue for wages.
    In this case, we need to recalculate wages and taxes on it also for one loaf as follows:
    Payroll \u003d 20 * 0.05 * 1.342 \u003d 1.342 rubles / loaf, where 20 is the price of the product, 0.05 - 5% of the revenue payment to the employee, 1.342 - we increase wages by the amount of social contributions.

Visual display of calculation in Excel

Using the example of calculating the break-even point of a bread store, which we calculated earlier, we will build a calculation graph and calculate the same parameter using Excel tools. Here's what it will look like:

The figure shows that we have calculated the break-even point using four cells. The lower profit calculation table for the store shows that it only comes out of losses when the sales volume becomes equal to 13,000 units (which is more than the calculated 12,368).

The formulas that we used to calculate the indicator can be seen in the following figure:

And the graph below shows the logic of calculating the indicator. In order to turn a profit, our revenue (blue line on the chart) must be greater than fixed (dark blue shading) and variable expenses (light blue shading) combined. The point of intersection of these two graphs is equal to the breakeven point.

Writing a business plan is impossible without calculating the break-even point using a formula. After all, the resulting number is the milestone after which the company's profit begins. In the article we will show how this point is calculated in different situations and give examples.

What you will learn about:

What is the break-even point and how to calculate it

Are you ready to name the fixed and variable costs (i.e. expenses) of the company for the product or for its implementation? Well, at least their approximate value?

If yes, then you are able to calculate for the firm a point at which there is no profit yet, but there is already no loss. The so-called break-even point of the company (English break-even point or BEP). Overcoming this boundary, the organization begins to earn profit.

Store managers can use the break-even point formula to determine how many units of a product they need to sell at a given price to achieve a minimum profit.

The calculation is used for planning, determining the correctness for the strategy for the future, and even for calculating the material motivation of employees!

More about the development of a personnel motivation system

To determine the BEP, you need to know:

  • the number of fixed costs - the amount that does not change with the volume of sales (for example, rent of the retail space of the store or the salary of the management staff);
  • the amount of variable costs - increases or decreases and depends on the volume of sales (for example, the cost of production (acquisition) of goods);
  • the price at which a product (service) is sold.

You can receive reports on expenses and income in the Business.Ru inventory program. With detailed cash flow reports, you will be able to perform the necessary calculations to determine the effectiveness of your business.

How to calculate the break-even point: formulas

There are several basic formulas for calculating the break-even point of a business. One is based on the number of units sold and the other is based on the value of sales.

Break-even point in physical terms: formula

The calculation looks like this:

BEP = Fixed Cost ÷ (Price - Variable Costs)

Important! When calculating in pieces, fixed costs are indicated as the sum of all expenses for the firm. In this case, the price and variable costs are calculated per unit of product.

Let's analyze the components of the formula:

  1. Fixed costs. As noted above, fixed costs do not depend on the number of goods sold, such as rent for trading area or industrial premises, computers and software. Fixed costs also include advertising fees and fixed labor costs.
  2. The denominator of the equation, price minus variable costs, is called the margin contribution in economics.

Margin is the difference between the selling price and the variable costs. So if you sell a product for $100 and the cost of materials and labor is $40, then the margin fee is $60. These 60 rubles are then used to cover fixed costs. If there is money left after that, it is your net profit.

Thus, if your sales equal your fixed and variable costs, you have reached the break even point. We are talking about a net profit or loss of 0 rubles. Any sales beyond this point contribute to your bottom line.

Keep track of your sales and manage inventory with Business.Ru inventory management software. With it, you can control sales volumes, check sellers, calculate the profitability of products and organize sales.

Break-even point calculation example


Entrepreneur Ivan has fixed costs, consisting of rent, depreciation of assets, wages and property taxes. These fixed costs amount to up to 60,000 rubles. . He is a sportswear tailor. Variable costs are calculated as 800 rubles per unit. He is going to sell suits for 2,000 rubles each.

60 000 / (2000 - 800) = 50 units

Therefore, Ivan needs to produce and sell 50 tracksuits per month to cover his total costs: fixed and variable.

Therefore, the 51st tracksuit sold is profitable, before that 50 pieces are simply break even.

The formula for calculating the break-even point in monetary terms

The break-even indicator in monetary terms is calculated when the product is in different price categories, and it makes no sense to calculate in units.

For example, if a cosmetics store sells varnishes for 100 rubles and perfumes for 15,000 rubles.

The calculation looks more complicated, since you need to find marginal income, then its coefficient (index).

You can calculate the index based on price and revenue.

If we take the price as a basis, then the marginal income is determined by the formula:

where MR is marginal income;

P - price (price);

AVC - variable cost per unit. goods.

For entrepreneur Ivan from the example above, the marginal income is equal to 2000 - 800 = 1200 rubles.

For Ivan KMR= 800 / 1200 = 0.67

Another way to calculate the index is based on revenue. Calculate the marginal income using the formula:

In this case:

TR is the company's revenue;

VC - total variable costs.

According to the formula KMR=MR/TR the marginal income index is calculated.

For example, Ivan's revenue is 100,000 rubles, while variable costs are 40,000 rubles.

MR = 100,000 - 40,000 = 60,000.

KMR = 60,000 / 100,000 = 0.6

Knowing this index (coefficient), we substitute it into the following formula for calculating the break-even point:

where BEP is the breakeven point,

FC - fixed costs;

KMR - marginal income index.

For entrepreneur Ivan BEP \u003d 60,000 / 0.6 \u003d 100,000 rubles.

Sometimes calculations with a graph or using Excel are used to determine the point.

Calculation with plotting

For clarity, the break-even point is calculated using the graph.

It is necessary to draw axes and designate monetary units vertically, and pieces horizontally.

The cost lines will cross the gross revenue schedule (also an inclined line).

At a certain point, gross revenue will cross the variable cost line. This is where the breakeven point is located.

On the chart, you can also see the threshold revenue and the threshold sales volume (that is, the volumes that must be reached in order to receive at least zero profit).

Figure - Determination of the break-even point on the chart

Break Even Point: Formula in Excel

The break-even point is calculated in Excel by filling in a table. We will present ready-made formulas and an algorithm so that you can do the calculation in five minutes.

1. Specify the quantity: you need to designate variable and fixed costs, as well as prices, as is done in the table below. At the same time, variable costs should be noted per unit of production:

2. Below we draw up a table in which gross costs, revenue, marginal income and profit will be calculated.

If you draw similar tables in the same cells, use the ready-made formulas:

  • Fixed costs $D$3;
  • Variable costs А9*$D$4;
  • Gross costs В9+С9;
  • Revenue (income) А9*$D$5;
  • Marginal income E9-C9;
  • Net profit Е9-С9-В9.

How to use break-even analysis: 5 areas of activity

Determining the break-even point is not the end of all calculations. When counting the numbers, you may find that you need to sell more goods than you thought in order to achieve at least zero revenue.

If you did the calculation of the break-even point using the formula when drawing up a business plan, you need to choose what needs to be done:

  • rise prices;
  • cut costs;
  • do both.

Important! If you come up with the idea of ​​selling unique products on the Internet, you need to understand whether these products will be successful in the market. The break-even analysis determines the number of products to be sold, but there is no guarantee that they will be sold in principle.

Existing businesses conduct this analysis before launching a new product or service to determine if the potential gains are worth the cost of launching.

This analysis is not just useful for launch planning. Here are a few ways companies can use the break-even point formula in their day-to-day operations and planning.

Whether to raise prices

If the analysis shows that you need to sell a large number of goods in the desired period of time, then you can check the cost of this product in the market. It may turn out that your price is below the market.

Set an average price, you can always lower it to have a sale.

You can calculate the profitability of products, analyze the cost and markup in the Business.Ru inventory program. With it, you can easily predict sales, make purchases based on profit analysis, run sales, and set automatic discounts.

Whether to use cheaper materials or reduce labor costs


If you want to quickly reach the break-even point, then you can pay attention to materials and labor. Find out how you can maintain the quality of products and services you desire while reducing costs.

The simplest thing is to cut your own salary in order to reach the break-even point faster.

For example, if Ivan from our example, who needs to sell 50 suits to reach the break-even point, cuts his salary by 7 thousand rubles, then this will reduce expenses to 53 thousand rubles a month.

Substitute the values ​​in the same formula:

53,000 / (2000-800) = 44,166 units. Therefore, if the manager's salary decreases, then it is possible to break even with a lower indicator.

The same will happen if Ivan uses cheaper knitwear for tailoring, having received the cost of one item of 600 rubles:

60,000 / (2000-600) = 42,857 units.

In this way, you can reach your goal faster without raising the price.

Calculation for new products

If you are about to launch a new product, a break-even point calculation is essential. Look out for new variable and fixed costs such as design and promotion fees.

Learn more about how to promote a new product to the market,

Using Zero Profit to Plan for the Future

If you understand how much money you need to make to break even, it's easier to set long-term goals. For example, if you are looking to expand your business and move to a higher rent, more traffic location, you can determine how much more you need to sell to cover all fixed costs.

To calculate material motivation

By understanding how much product you need to sell and how much money to make to break even, you can plan motivational tools. That is, to establish sales standards, above which sellers receive additional bonuses.

A transparent system of employee motivation can be installed in the Business.Ru program. So your subordinates will understand how much and for what they have earned. Set plans for them, distribute tasks according to their importance, track the percentage of completion.

Examples of calculating the break-even point using the formula

An example of calculating the break-even point for a store

Let's determine the break-even point for a hardware store that has a wide product range, so it makes no sense to calculate the number of sales. It is necessary to calculate the break-even point according to the formula in monetary terms.

Store fixed costs:

  • rent including utility bills;
  • salaries of staff and manager;
  • insurance premiums;
  • advertising.

Variable store costs:

  • purchase of goods.

Let's put them in two tables.

fixed costs

Amount RUB

The product is sold at a premium, and the revenue will be 1,250,000 rubles.

Marginal income: 1,250,000 - 500,000 = 750,000

Marginal income ratio: 750,000 / 1,250,000 = 0.6

The break-even point is calculated: 270,000 / 0.6 = 450,000 rubles.

What should a store do if the break-even point is higher than sales volume?

The owner of a small store can try to cut his costs, but such savings can be a critical business mistake. There is a chance to get into a "spiral of fall".

The essence of the “downward spiral” is that spending cuts can affect:

  • on the quality of service (for example, when reducing the position of a sales assistant);
  • on the quality of the product itself, which is sold (you will choose cheaper brands, and sell with a more serious margin).

If the quality deteriorates, you will realize that some of the customers have gone to a competitor, so the profit has decreased again. If the store owner cuts costs again, there will be no return to positive revenue: there will be even fewer customers, and as a result, the businessman will lose all the money invested.

There is a version that the concept of "Black Friday" arose in retail to mark the breakeven point. The fact is that most retailers receive the main income in the last five weeks of the year (preparation for the Catholic Christmas and New Year). Before that, it just works to break even. Profit allows you to make reserves "for a rainy day."

Do I need to take into account the wages of the owner when calculating the break-even point?


This question is asked by many business owners. The salary of the owner of the company must be included in fixed costs when calculating the break-even point, so wages will be fixed. How much is up to you to determine, but it should be higher than regular staff.

Many store owners end up failing because:

  • do not plan their own salary in the first year;
  • set their own minimum wage, less than a cashier or cleaner.

You can not pay a salary only if you are not a manager or a manager, but retire by hiring an outside manager. However, this rarely happens when we are talking about small businesses.

An example of calculating the break-even point for an enterprise

Let's calculate the break-even point for a small enterprise for the manufacture of liquid for washing car windows.

Let's take the following indicators:

  • fixed costs of a small business - 50,000 rubles;
  • variable costs for the manufacture of 1 container of liquid (raw materials) - 50 rubles;
  • wholesale price - 80 rubles.

Find the breakeven point: 50,000 / (80 - 50) = 1666.6.

Thus, the company needs to sell 1667 glass washer units in order to become profitable.

Calculation example for a catering company

The break-even point for a restaurant or cafe helps determine the required average check and the number of guests that need to be served per day. We advise you to determine this indicator before opening a restaurant, when planning and determining the prospects for the catering market.

Read more about the trends and prospects of the catering market

It is necessary to determine the variable and fixed costs, which include grocery purchases, rent, salaries of cooks, waiters and other employees, marketing costs.

For example, the fixed costs of a restaurant are 150,000 rubles, while the preparation of one dish (on average) requires products worth 130 rubles. The dish is sold with an extra charge of 280 rubles.

Let's calculate how many dishes need to be sold in order to reach zero profit.

150,000 / (280 - 130) = 1000 pieces per month. Therefore, it is necessary to serve 34 guests a day, who will eat one dish each.

If you need to calculate not the number of dishes sold, but the average check per day, then first we will determine the margin coefficient.

The amount of marginal income from one dish: 280 - 130 = 150 rubles.

Marginal income ratio: 150 / 280 = 0.53.

The break-even point is calculated as 150,000 / 0.53 = 283,018.9 rubles.

Thus, the restaurant should sell for 283,019 rubles per month, or 9,434 rubles per day.

Thus, if you raise the average check from 280 rubles to 350 rubles per day (for example, by persistently offering a drink), then the restaurant will need only 27 visitors to reach the break-even point.

Calculation example for services of a service company

Let's calculate the break-even point for a service company whose main indicators are as follows:

  • the average cost of one service is 3000 rubles;
  • a set of fixed costs (rent, staff, office expenses, advertising) - 250,000 rubles;
  • there are no variable costs.

In physical terms, the break-even point is calculated as follows:

BEP = Fixed costs / Cost per service = 250,000 / (3000 - 0) = 83.3. Thus, the service company needs to sell at least 84 units. services per month (that is, serve 84 customers) to break even.

In value terms, the break-even point coincides with the set of fixed costs, since there are no variable costs in the firm.

For ease of calculation, entrepreneurs are advised to use Excel spreadsheets, where they enter data on variable and fixed costs, as well as unit prices.

To calculate, you must use the formulas:

By changing the numbers in the table in the column "Production volume", we determine when releasing (selling) how many units the company will find the break-even point.

Thus, with the release (sale) of 12 products, the company "went to zero". The 13th unit is already profitable.

Conclusion. The break-even point can be calculated in various ways, in physical terms or in monetary units. When planning, the indicator helps to determine whether it is worth doing business at such costs. Also, the point of zero profit helps to plan motivational programs for sales assistants of the store and determine by how much the average check should be increased for the restaurant in order not to close due to losses.

Any area entrepreneurial activity businessmen are faced with the problem of calculating losses and profits on existing projects.

In other words, when the invested money will bring real profit. To do this, use the break-even point formula.

A correctly calculated break-even point formula can show how effective the investment project under consideration will be and how soon it will pay off, what is the risk of losing the invested money. The entrepreneur or the top management of the company must decide whether to invest in an investment project, or it should be postponed, and the calculation of the break-even level plays a key role here.

Break Even Point: What is it?

The break-even point (formula) shows the required level of production and subsequent sale of products to cover all waste and costs.

In other words, it is the volume of sales at which the firm's profit is zero.

The coefficient is measured in monetary and natural terms.

In practical terms, the indicator serves as an excellent indicator of the size of production and sales of products (services), where the initial costs of the company are fully covered by the incoming cash flow. The coefficient is used by company managers in the process of creating and analyzing a future project.

The higher the break-even level of the company, the higher the indicator of its solvency and, as a result, financial stability. If the value of the break-even ratio increases, this indicates the presence of structural problems within the company that have a negative impact on profit.

Features and benefits of using

  • The ability to calculate by what value you can reduce revenue so that in the future you will not be at a loss. It is especially important if there is an increase in actual revenue over the estimated one.
  • The ability to identify the structural problems of the company associated with a temporary change in the break-even level.
  • The ability to determine the prospects of a new investment project, as well as the time frame in which it can fully pay off.
  • Ease of use.
  • Calculation of the break-even level makes it possible to identify the interdependence of the cost of products with the volumes of its sale to end consumers. It makes it possible to calculate the most favorable price threshold of the offered products.

The use of the break-even point formula is most effective in markets characterized by low levels of competition and strong consumer demand.

The globalization of all levels of markets creates a fluctuating demand for domestic products.

Application practice

The break-even point is used for various purposes.

The most used areas, as well as the purposes of applying this coefficient, are external and internal users.

External Users:

  • State. An assessment is made of the sustainability of the development of the audited enterprise.
  • Investors. Analytics of the effectiveness of the development strategy used.
  • Lenders. Analysis of the solvency of the proposed investment project.

Internal users:

  • Production process manager. Identification of the minimum level of production of goods.
  • Shareholders (owners). Determining the level of profitability of the company.
  • Director of Sales. Analysis of future costs, the impact of competition, finding the optimal price ratio, drawing up a sales plan.

The practical use of the break-even level allows you to make effective management decisions, determine the financial stability of the company, and also determine the indicator of critical production.

Formula

Break-even point in monetary (value) terms (profitability threshold), formula:

Break even ratio = FC/KMR

  • Where, FC - waste that does not depend on the production process (rental of premises, tax deductions, salaries to administrative staff).
  • KMR is the cost of goods sold.

Based on the results of the calculation, the critical amount of revenue can be determined, at which the level of loss reaches zero.

Break-even point in kind. To identify the break-even level in physical terms, the following indicators should be used:

  • Variable Costs (AVC);
  • Unit cost of products sold (P);
  • Fixed costs per volume of goods produced (FC).

The calculation is carried out according to the following formula: FC/(P-AVC)

Based on the results of the calculation, a critical volume of products sold in physical terms will be obtained.

Profit from sales is the end result of the company's activities. This article details the formulas for calculating profits and applying the results to improve the rate of return.

Indicator use model

In the process of calculating the coefficient, the following assumptions are always used:

  • The cost of output and its volume have a linear relationship.
  • The indicator of production capacity is constant, the structure of the manufactured product is unchanged.
  • Variable costs, as well as the cost of production, do not change.

Stocks of finished goods in warehouses are insignificant and do not distort the final break-even level of the firm.

Formula calculation steps

There are three key steps to effectively determine a firm's break-even point:

  1. Collection of a complete data package for its rigorous analysis. Evaluation of production volumes, profits, sales and losses.
  2. Determining the amount of fixed and variable costs. Identification of the security zone.
  3. Evaluation of the required sales volumes of products to ensure the financial stability of the company in the future.

In essence, the task is to determine the maximum minimum levels of financial stability of the company for the estimated time in the analysis.

Identification of tools for increasing the boundaries of the security zone.

Before proceeding with the calculation of the break-even level, it is important to understand which expenses of a firm are classified as fixed and which expenses are variable.

Variable costs include the wages of workers, the technological needs of the enterprise, the purchase of semi-finished products, the purchase of components, energy

The constant waste of companies is rent, additional wages for workers (management and administrative level), depreciation, etc.

An example of calculating the break-even point for a company

Here is an example of how to calculate the break-even point. To demonstrate, we use the break-even calculation for the enterprise.

Many small and medium-sized firms specialize in the production of a homogeneous product, with a characteristically the same cost.

Therefore, it is most rational for the company to make the calculation in kind. The cost of the product is four hundred rubles. Fixed and variable costs are shown in the table.

Permanent Rubles in thousand Variables (unit of output) Cost in units (rub.) Volume of production Rubles (thousand)
General expenses 80 Payroll deductions 20 1000 pcs. 20
Spending on utility services 20 Costs for the purchase of semi-finished products 90 1000 pcs. 90
Employee salary 100 Purchase of materials (for the entire production process) 150 1000 pcs. 60
Depreciation deductions 100 Basic workers salary 60 1000 pcs. 60
Outcome 300 320 320

According to the calculation by the formula, the break-even point will be:

VER = 300,000 / (400 - 320) = 3750 pieces.

Therefore, the company needs to create at least 3750 units of products to reach the level of one hundred percent payback. Exceeding the specified level will mean the company's output to receive real profit.

The break-even point is fairly easy to calculate if the full range of data is available. But it is important to consider that a number of assumptions are used in the calculation. In particular:

  • The firm leaves the previous price threshold even with an increase in sales volumes, although in reality, especially over a long period of time, this assumption is unacceptable.
  • In the process of selling products, there is always a certain percentage of the balance. It is not present in the example.
  • The break-even formula was used in relation to a single category of goods. If in reality there will be several product categories, the structure should remain constant.

Expenses are compiled unchanged. In reality, as the level of sales increases, the expense ratio will also increase.

Conclusion

In conclusion, we can say that the break-even point is an extremely important coefficient in matters of planning the volume of sales of products, the production of goods. The break-even point allows you to derive the exact ratio between profit and waste, as well as make a decision on the issue of pricing policy.

The range of application of the break-even point is quite wide. The formula is actively used in all areas of business, especially in planning an investment project, as well as making decisions at a strategic level.

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