Any businessman tries to determine when his company ceases to incur losses, and begins to earn, working out the money invested in it. Break-even point is a good tool for those who want to see the ratio of revenues and costs of the enterprise. For a better understanding, you can build a break-even point chart, on which it will be clearly visible at what rates revenue, fixed and variable costs are growing, as well as see in which period exactly the cash flows will become positive.
Break-even point determination
This parameter shows how many products a company needs to produce in order to cover all its costs at a certain price, while entrepreneurial profit should be zero.
If the company will sell more goods, then it will make a profit. In the case when the quantity of products sold is below the breakeven point, the entrepreneur works at a loss.
Parameter natural expression
Calculation can be made in two ways: in monetary terms and in kind. This indicator in monetary terms has a second name - the threshold of profitability - the total revenue of the enterprise, which covers the total costs. It is often used to measure the effectiveness of family farming enterprises. Also, thanks to the threshold of profitability, you can calculate the minimum price at which all costs will be fully covered.
In order to determine the number of products manufactured by the company, you should use the indicators of total and variable costs, as well as prices. If you build a break-even point chart, you can miss the price and replace it with revenue.
Imagine that total fixed costs are Hypost; variables for 1 unit Products - IP; the cost of 1 unit - Ced. Then the formula will take the following form: Hypost / (Tsed-Ip).
The difference between variable costs per unit of production and price is called marginal revenue per unit of output.
Profitability threshold
The calculation of the profitability threshold is more complicated than the break-even point in physical terms. To calculate this indicator, fixed costs (TFC), revenue (R), and total variable costs (TVC) should be considered. The difference between revenue and variable costs is marginal revenue (MR).
Using these indicators, it is necessary to determine the margin income ratio (KMR) - the ratio of marginal income to revenue. Profitability threshold is the ratio of total costs to margin income ratio - TFC / KMR. In some cases, it is more convenient to avoid calculating this coefficient. Then the formula can be represented as follows: TFC * P / MR.
Break-even point chart
The breakeven point in the planning of firms is difficult to overestimate, since its increase can mean difficulties in making a profit. It is important to note that the value of the parameter will change not only due to rising costs or product prices, but also in the case of expansion of production. In order to see in more detail the relationship between costs and output, it is necessary to build a break-even point chart. It is actively used in the modern economy.
To understand how to plot a break-even point on your own, you should first try to understand the theory and understand what factors affect this value.
The abscissa axis must display the number of goods sold. The company's revenue is reflected in the ordinate axis. The following is a graph of variable and fixed costs. The size of fixed costs does not change depending on the number of sales and products sold, so their schedule will be represented by a line parallel to the abscissa axis. The sum of variable costs is proportionally dependent on the size of sales, so this type of cost is shown as a line that goes from point 0 and grows with an increase in the number of output.
On the chart, break-even point should reflect the total costs. For this, it is necessary to summarize the variable and fixed costs. Therefore, on the chart, break-even points are displayed by a line parallel to variable costs. It, in turn, originates where fixed costs are.
The final step in plotting is to show the line of business income. On the chart, the breakeven point is at the point where revenue crosses the line of total costs. The economic meaning of the breakeven point is revenue at which profit is zero or revenue capable of covering all fixed and variable costs of the company.
