Break-even point: what is it and how to calculate

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    Break-even point is a concept that should be known to every businessman before starting a business, because this is the so-called “benchmark”, from which the company will begin to make a profit.

    After all, you need to understand that not all money received in the process of doing business will go into the pocket of the owner. There are also production costs, taxes, equipment modernization costs - all this must be taken into account so as not to be disappointed in the end due to unjustified expectations.

    Therefore, in this article we will analyze in detail what the break-even point is, why it is needed and how to calculate it correctly.

    What is the breakeven point

    What is the breakeven point
    What is the breakeven point

    Break-even point (eng. Break statement-even point ) - the level of prices and sales, in which the sum of the profits equals the sum of costs incurred for the production, ie, expenses equal income. The breakeven point is also called the "dead point", as it reflects the moment from which the company begins to earn, and not just "go to zero."

    The breakeven point is measured in two terms: in-kind and money. Its calculation allows you to determine the volume of goods sold or services rendered so that the company will cover the expenses. After passing this point, we can say that the company will begin to make a profit after the amount of revenue received will be more than expenses.

    What break-even point shows

    What break-even point shows
    What break-even point shows

    The breakeven point is a very important indicator, since it allows you to see many points, among which:

    • The need to make changes in the conduct of activities (expansion of production, points of sale or sale of products, commissioning of more modern technologies);
    • Revision of pricing policy and assortment (its expansion or reduction);
    • How stable are the financial indicators of the enterprise, which is also important for investors and lenders;
    • Identification of "weaknesses" of the company and their timely elimination;
    • Creating an effective and working plan for the sale of products;
    • Understanding how severe a crisis a company can survive in the event of an unfavorable economic situation;
    • Understanding how to change the company's income when the price and volume of production change.
    • It should be borne in mind that the breakeven point is a dynamic indicator , therefore, at different periods of the company’s activity and the general economic condition of the country and the world as a whole, the values ​​will differ. Therefore, when determining the profitability of a business, several parameters should be considered at once.
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    You also need to consider that, most likely, the break-even point value obtained will be relative, since there are a number of factors that are constantly changing, which does not allow to obtain an absolutely accurate calculation:

    • The price of goods may vary. Most often this occurs when all products or individual products begin to enjoy greater popularity and the company can increase sales volumes. In this case, the company, as a rule, raises the price;
    • Costs may vary. In the event of an increase in demand for products, the volume of expenses and expenses for equipment also grow proportionally;
    • A certain volume of goods is not sold. A certain part of the product may not be sold or stored in a warehouse or disposed of (for example, perishable products);
    • Assortment may vary. As a rule, companies, especially young ones, often experiment with the assortment in order to see which products are popular and their volume should be increased, and which ones should be removed from the assortment.

    How to calculate the breakeven point

    Break-even point calculation
    Break-even point calculation

    How to calculate the breakeven point:

    1. Define and calculate fixed costs of the enterprise.
    2. Define and calculate the variable costs of the enterprise based on one unit of goods.
    3. Calculate the unit cost of a product or service.
    4. Substitute the obtained values ​​in the formula for calculating the break-even point in physical terms.
    5. Calculate the final result.

    Below we will consider in detail the formulas, as well as the procedure for calculating the breakeven point.

    Break-even point formula

    As mentioned above, there are two ways to calculate the breakeven point - in kind and in money terms, respectively, there are two formulas for each of the options.

    Break-even formula in physical terms:

    TB = PeZ / (CPU - POS), 

    Where

    • TB - breakeven point;
    • PeZ - variable costs;
    • CPU - product price (per unit);
    • POS - fixed costs.

    The result will show how many units of goods the company must sell in order to achieve self-sufficiency.

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    Break-even formula in monetary terms:

    TB = (VP x POS) / (VP - PeZ),

    Where

    • TB - breakeven point;
    • VP - sales revenue;
    • PeZ - variable costs;
    • POS - fixed costs.

    According to the result of calculations, you can understand how much you need to sell goods in order to go “to zero”.

    Break-even point calculation

    Break-even point calculation rules
    Break-even point calculation rules

    Before you begin the calculation, you need to understand what are fixed and variable costs.

    Fixed costs (indicated in the formula above as POS) are costs that are independent of the volume of production and their volume remains static for a long period.

    This may include:

    • Salary of employees;
    • Rental of premises;
    • Depreciation of equipment;
    • Taxes and fees;
    • Advertising;
    • Credit payments and loans.
    Variable costs (indicated in the formula above as PeZ) are costs that directly depend on the volume of production. Depending on whether more or less goods are produced by the enterprise, variable costs will also rise or fall.

    These include the following:

    • The price of raw materials for the manufacture of products;
    • Payment for electricity and other resources (for example, gasoline for logistics);
    • Consumables for equipment;
    • Salary of employees if piece-rate wage is introduced.

    Then you can proceed directly to the calculation of the breakeven point, following certain steps :

    1. Gather all the necessary information for calculations, such as production volumes, how many goods are sold, production costs and profit.
    2. Divide expenses into fixed and variable.
    3. Calculate the breakeven point and the level of sales at which the financial security of the company is maintained.

    The task of all these calculations is to determine the necessary volume of sales of goods for which there is an economic sense of doing business.

    Break-even point calculation example

    Break-even point calculation example
    Break-even point calculation example

    The following examples clearly show how the formulas for calculating the breakeven point work and how to apply them correctly.

    The company sells fitballs, which it purchases from a Chinese manufacturer at a wholesale price. Given: - Price of one fitball: 500 rubles; - Variable costs for 1 fitball (purchase price, salary to sellers): 200 rubles; - Fixed costs (rental store and warehouse, taxes): 10 000 rubles; - Monthly sales revenue: 150,000 rubles. It is necessary to calculate how many fitballs you need to sell to cover all costs (in-kind calculation), as well as how much (monetary calculation).

    First, we use the formula for calculating in kind. To do this, find the ratio of variable costs and differences in product prices and fixed costs:

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    TB = 10,000 / (500 - 200) = 33.3

    We round and get a value of 34 fitballs.

    Now let's see how much we need to sell fitballs to cover all costs. To do this, substitute the values ​​in this formula: TB = (VP x POS) / (VP - PeZ):

    TB = (150,000 x 10,000) / (150,000 - 200) = 1,500,000,000 / 149,800 = 10,013

    It turns out that the company needs to sell fitballs in the amount of 10 013 rubles, so as not to go negative.

    Break-even point chart

    Break-even point chart
    Break-even point chart

    The graph allows you to more clearly see at what level of sales the breakeven point is. Here is an example of a break-even point chart:

    Break-even point chart example 
    Break-even point chart example 

    As can be seen from the graph, the revenue line (we have it marked in blue) should grow steadily - this indicates that the company is developing, and its income is increasing. Together with it, the line of variable costs should also grow (we have marked gray), however, it should be located below the revenue line. The fixed cost line (marked in red) is unchanged and does not depend on the level of production or sales.

    Also, the graph shows the level of costs in rubles in our case (vertical) and the level of sales and revenue in percent (horizontal).

    Gross costs, which are marked in yellow on our chart, are the total amount of all costs, i.e. constants and variables.

    To determine the breakeven point, using the graph, you need to find a place where gross revenues intersect with revenue - this will be the level of lower sales at which the company will not suffer losses. In the above chart, this is 40%.

    As you can see, the breakeven point is an important indicator that allows you to get information about the state of affairs of the company. These data will be useful both to the enterprise itself, and to investors and lenders.

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