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

The main goal of any enterprise is to make a profit. The success of the company depends on its size. To find the amount of net income, an entrepreneur must know how many goods and services he needs to sell in order for the company to fully pay for itself. This helps to find the break-even point.

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A bit of theory

The break-even point is the amount of goods sold, upon reaching which the organization will fully cover the costs of its manufacture, but will not receive income. After its completion, the project will begin to pay off.

The indicator can be measured in:

• monetary units;
• volume of manufactured products;
• the number of pieces produced or sold products.

Knowing what a break-even point is will help an entrepreneur understand how effectively the business he created is functioning.

The business owner must control the value of the indicator. An increase in the break-even point indicates that there are problems in the company that need to be addressed immediately. If you leave the changes in the indicator without attention, the entrepreneur risks burnout.

The break-even point value is affected by level changes:

• pricing;
• turnover;
• enterprise growth.

Thinking about what the break-even point shows, the business owner should know: finding an indicator allows you to understand whether it is possible to invest in a project and when it will start to make a profit. Timely detection of growth in value will allow you to identify existing problems and eliminate them.

TB will allow you to understand how much product you need to release in a certain period of time in order to receive income from the created business.

The indicator affects the price of the product. It allows the business owner to understand to what level the cost of products can be reduced in order to increase the attractiveness of the company in the eyes of potential buyers, but not to remain in the red. If the point has decreased, the owner of the company must understand what contributed to this and in the future try to repeat the success achieved.

How to calculate

To understand how to calculate the break-even point in monetary terms, you first need to understand the indicators that need to be found to determine the value. Finding value requires understanding what fixed and variable costs are.

fixed costs are the expenses of the enterprise, which do not depend on the quantity of goods produced. These include:

• salaries of specialists who receive fixed accruals;
• room rental fee;
• depreciation deductions.

Variable costs- This is a value, the size of which depends on the number of products produced. The list includes costs for:

• materials;
• fuel necessary for the operation of the equipment;
• wages of workers who receive money depending on the amount of output;
• electricity spent for technical needs.

Typically, fixed costs do not change over time. However, the growth of their volume or its decrease can be affected by:

• increase in the cost of rent or its decrease;
• increase in the company's capacity or decrease in production;
• a new workshop was opened at the enterprise or an existing one was closed;
• rising inflation.

Variable costs are dependent on the number of products produced and change with its volume.

The more goods were produced by the organization, the greater the cost of its release. However, the amount of variable costs per unit of output does not change with an increase in total production.

Calculation methods

The formula for calculating the break-even point allows you to determine the size of its value. In practice, there are two ways to find the size of the indicator. The indicator can be presented in the form of the number of units of products that need to be produced, and in monetary terms. If the break-even point is calculated through fixed and variable costs, the entrepreneur will find the value of the indicator in physical terms.

Formula to perform a search is as follows:
Break-even point \u003d Fixed costs: (Cost of 1 unit of goods - the amount of variable costs for the production of 1 unit of production)

If an entrepreneur needs to search for a value in monetary terms, he must use a different method of calculation. First you need to find the amount of marginal income and its coefficient.

• MD= Revenue – Variable Costs
• KMD= Share of contribution margin in revenue: Revenue
• TB in monetary terms \u003d Fixed costs of the company: Marginal income ratio

The resulting value shows how much you need to sell products for the profit to be equal to 0.

Search for TB in monetary terms

To understand the features of finding a value, you need to study the following example. If an entrepreneur is engaged in the sale of finished products, it makes no sense to find the value of the indicator in physical terms. The amount of goods sold is too large. For this reason, it is better to immediately start performing calculations to find values ​​in monetary terms.

Timely detection of an increase in the importance of TB will allow us to identify existing problems and eliminate them

First you need to deal with fixed and variable costs. Fixed costs include (in this case):

• wage;
• room rental fee;
• payment of utility bills;
• expenses for the advertising campaign.

Variable costs for a household appliance store will be the purchase cost of products and the cost of goods that must be sold according to plan.

The amount of fixed costs in rubles is presented below:

1. Salary - 60,000.
2. Rental fee - 100,000.
3. Payment of utility bills - 15,000.
4. The cost of conducting an advertising campaign - 25,000.

Total: 200,000 rubles.

Variable store costs:

1. The purchase price is 1,000 rubles.
2. The number of pieces that need to be sold according to the plan is 100 rubles.

Total amount: 100,000 rubles.

The sum of all fixed costs for the operation of the store is 200,000 rubles, and the variable costs are 100,000. To start the calculations, the business owner needs to know the amount of sales revenue. Let it be equal to 500,000 rubles. Then,

1. MD is equal to 500,000 - 100,000 \u003d 400,000 rubles
2. KMD is 400,000: 500,000 = 0.8
3. The TB of the store will be at the level of 200,000: 0.8 = 250,000 rubles

To cover all expenses, the store will need to earn 250,000 rubles. In this case, the profit value will be equal to 0. If the company earns more than 250,000, it will start earning, if less, it will not be able to cover expenses.

If the store's income is less than the break-even point, the business owner should consider upgrading the organization or closing it.

Search for TB per unit of production

Finding an indicator for a small enterprise engaged in the production of the same type of product is different from finding a value for a store. For such a company, it makes sense to find the break-even point in the form number of units of manufactured products.

The amount of fixed costs:

1. Fixed salary - 50,000;
2. Payments to utilities - 15,000;
3. General production expenses - 100,000;
4. Depreciation deductions - 135,000;

Total: 300,000 rubles.

Variable costs for the production of 1 unit of goods:

1. Purchase of materials - 100;
2. The salary of workers receiving accruals from output - 150;
3. Purchase of semi-finished products - 150;

Total amount: 400 rubles.

Let the enterprise sells 1 unit of goods at a price of 500 rubles. Then, the break-even point of production is 300,000: (500 - 400) = 3,000 units. In order for the company to fully recoup all the costs invested to ensure the functioning of production, it needs to produce 3,000 units of products.

If the company produces more, it will begin to make a profit, if less, the invested costs will not be able to pay off.

If all the data is at the disposal of the entrepreneur, it will not be difficult to find the value of the quantity. However, keep in mind that the size of the indicator will be correct only if:

• the company will not change the price for 1 unit of products sold;
• manufacturing costs will not be increased or decreased;
• the entire volume of output will be fully sold.

It should be remembered that the break-even point is calculated for only one type of product. If the entrepreneur decides to take into account several product options at once, their ratio should remain unchanged.

To better control the position of the enterprise at the current moment, the owner of the company can present the indicator in the form of a graph. It will allow you to visually understand where the company's profit is going and whether the organization needs to be reformed. If the profit line is directed downwards, it is necessary to take immediate measures to normalize the situation.