Determination of the profitability threshold. Profitability threshold. Margin of financial strength. Operating leverage - Abstract. Total variable costs

The profitability threshold is an important indicator that characterizes the financial condition of an enterprise. We calculate it in Excel, graphically and using formulas.

How to understand where the border lies beyond which the enterprise will move from an unprofitable zone to a profitable one? The profitability threshold will help you understand this. Next, you will learn what it means, how it is calculated and what is the relationship between it, as well as the margin of financial strength and operating leverage. Download the Excel model and make calculations based on your data.

This is an indicator that gives an idea of how many products, works or services need to be produced in order to recoup the company’s expenses for common types activities. In other words, in this case, the profit from sales is zero, as well as the losses. Otherwise it is also called profitability entrepreneurial activity or break-even point.

The indicator characterizes the company from various aspects. On the one hand, it reflects the state of the organization in which the enterprise does not make a profit, but also does not have losses. This is a satisfactory financial condition. On the other hand, it allows you to determine the sales volume or price level at which production activities will begin to make a profit.

Profitability threshold: formula

It is calculated using one of the following formulas:

Profitability threshold = Fixed costs ÷ (Price – Variable costs per unit)

Using the above formula, the indicator is calculated in in kind, that is, it demonstrates how many units of products or services need to be produced for the enterprise to stay afloat.

Profitability Threshold = Revenue × Fixed Costs ÷ (Revenue – Total Variable Costs)

Since the calculation is based on the company’s revenue received during the reporting period, as a result we will obtain the value of the profitability threshold in in monetary terms. You can use any of these formulas, as well as the graphical method.

Get a set of profitability formulas: investments, assets, capital, sales, costs, products, core activities. Choose which indicators to consider: efficiency of sales, resources expended, assets or capital. Download instructions and sample reports to monitor profitability individual species property and business processes.

Calculation of the profitability threshold graphically

The graphical method is the most visual method that allows you to determine and analyze the profitability threshold. To build a graph, you need to calculate revenue and variable costs for two values of sales volumes. The results obtained are plotted on a graph, where the X-axis shows the volume of products sold, and the Y-axis shows the monetary value of revenue and costs. The graph allows you to see the position of the company, as well as understand at what level of sales the company begins to make a profit and when it operates at a loss.

Graphically it looks as shown in the diagram.

Figure 1. Profitability threshold: graphical method

How to determine the break-even point: an example

Table 1. Initial data for the example

	Value for the first quarter of 2019
Sales volume, pcs.


Fixed costs per unit of production
Total fixed costs
Variable costs per unit
Total Variable Costs

Let's calculate the profitability threshold in physical terms:

RUB 78,364 ÷ (RUB 2,999 – RUB 1,364.55) = 47.95 pcs. ≈ 48 pcs.

To reach the break-even point, the company needs to produce and sell 48 pieces of the Krokha developmental music center.

Let's determine the ruble value of the same indicator. To do this, we will use the second calculation formula:

(RUB 401,866 × RUB 78,364) ÷ (RUB 401,866 – RUB 182,850) = RUB 143,787.79

It turns out that in order to reach the break-even point, the company needs to produce and sell products worth 143,787.79 rubles.

If sales growth does not bring additional profit or increases it only slightly, you need to find out what conditions sales policy this is prevented. To do this, it is necessary to determine the profitability of distribution channels, the rationality of the system of bonuses and discounts, and the efficiency of commercial expenses.

Calculation of the profitability threshold in Excel

determine fixed and variable costs per unit of goods, as well as sales volume;
We calculate the values of revenue, costs and profit from sales;
we find the zero value of the financial result. Revenue and physical sales volume at this point will show the profitability threshold.

Figure 2. Profitability threshold in Excel

The indicator under consideration is closely related to two more: the margin of financial strength and operating leverage. In fact, they are all united by the same analysis method, which is the basis - CVP (Cost-Volume-Profit). Let's look at what formulas they are calculated by and what they mean.

Profitability threshold and financial safety margin: how are they related?

The margin of financial strength is the difference between the actual or planned revenue of the enterprise and the income at the break-even point. Otherwise, it is a foundation that allows the organization to make a profit. The bigger it is, the better. For example, the break-even point for product A in your company is 1,000 units, but you sold 1,500 units last month. This means that the operating result will increase by the marginal income from the sale of those same 500 additional units.

________________

Note.

________________

This indicator is otherwise called the margin or margin of safety. It is calculated either in absolute terms - in rubles, or in relative terms - in percentages. Relative value It also has another name - safety margin coefficient.

Table 2. Financial safety margin: calculation formulas

Why is revenue shown differently in the formulas: both as actual and as planned? This point depends on the period for calculating this indicator. If you determine it by the income values already achieved for the last month, quarter or year, then take the actual value. If you estimate future values based on revenue from the newly compiled budget of income and expenses, then use the planned value.

Let's continue with the toy manufacturer example. Let's say:

revenue from the sale of the Krokha music center in the budget for the first quarter of 2020 is 497,542 rubles;
for this purpose the price is planned to be raised by 5%;
variable costs per unit will increase by 3%;
constant expenses that fall on this product will increase by 20 thousand rubles.

Let's calculate the new value of the break-even point, and at the same time the margin of financial strength.

Table 3. Calculation of financial safety margin

Indicator (in rubles, unless otherwise indicated)	Value for the 1st quarter of 2020
Initial data

	3,149 ≈ 2,999 × 1.05
Variable costs per unit	1,405.49 = 1,364.55 × 1.03
Total fixed costs	98 364 = 78 364 + 20 000
Calculated values
Profitability threshold	179,493 ≈ 98,364 ÷ (3,149 – 1,405.49) × 3,149 ≈ 57 units. × 3 149
Financial strength margin	318 049 = 497 542 – 179 493
Margin of financial strength, %	63.9 = 318,049 ÷ 497,542 × 100

How to interpret the obtained safety margin values? Here are two options:

even if in the first quarter of 2020 sales of the Krokha music center turn out to be less than planned by 318 thousand rubles, there will still be no loss from this product;
the planned sales volume is almost 64% higher than the breakeven one. It turns out that the organization has a significant reserve. It can be used, for example, during marketing campaign on the product in the form of a price reduction. In addition, thanks to this reserve, the company will not be driven into losses by an unexpected increase in fixed or variable costs. For example, fixed costs may increase by 177 thousand rubles. (by 80%), and the organization will still remain in the profit zone. This is clearly visible on the graph.

Figure 3. Margin of financial strength on the break-even chart

Return on investment is an indicator that allows you to evaluate the effectiveness of financial investments and their return on investment. From English ROI (return of investment) is translated as “return on investment”. This indicator should be determined by already open projects, and those in which the company is just planning to invest.

Download the ROI formula

Operating leverage: formula

Operating leverage in simple words is the relationship between the change in income and profit from sales. Why is it needed? For example, to quickly calculate the value of operating profit or loss, when it is known by how many percent the price or sales in physical terms will increase.

Two formulas have been derived for operating leverage: one for price leverage, the other for natural leverage. Both are based on the ratio of income to financial results. Only in the first case is the total income from ordinary activities (revenue) taken, and in the second - marginal.

Table 4. Operating leverage: calculation formulas

Obviously, the value for price leverage will always be higher than for natural leverage due to the larger numerator. This has its own logic: an increase in price does not entail costs, but an increase in sales volume does. The reason is the variable component in expenses: the higher the natural volume of sales, the greater its value.

If you know what operating leverage is, then calculating the percentage change in profit from sales will not be difficult. It is based on the formulas from Table 5.

Table 5. Impact of operating leverage on profit

Of course, you can calculate profit with a known changed value of price or quantity without this indicator. But the fact is that it allows you to significantly speed up the process. Here's an example.

Let’s assume that the management of Kolobok and Teremok decided in the second quarter of 2020 to increase the price of the Krokha music center by another 3%. Sales, according to their expectations, will decrease by 1% in the same period. How will such changes individually affect sales profits? Let's calculate the result using the formulas from Table 5. To do this, we'll additionally calculate the financial result and the total marginal income.

Table 6. Calculation of operating leverage

Index	Value for the second quarter of 2020
Initial data (Q1 2020)
Revenue, rub.
Total marginal income, rub. [(Price – Variable cost per unit) × Quantity]	275,474.58 = (3,149 – 1,405.49) × 158*
Profit from sales, rub. (Total contribution margin – Total fixed costs)	177 110,58 = 275 474,58 – 98 364
Calculated values
Price operating leverage, units.	2.81 = 497,542 ÷ 177,110.58
Natural operating leverage, units.	1.55 = 275,474.58 ÷ 177,110.58
Impact on sales profit through product price, %	8.43 = 3% × 2.81
Impact on sales profit through product price, rub.	192,041 = 177,110.58 × 108.43 ÷ 100
Impact on sales profit through the quantity of product sold, %	1.55 = (-1)% × 1.55
Impact on sales profit through the quantity of product sold, rub.	174,365.37 = 177,110.58 × 98.45** ÷ 100
Note: * 158 = Revenue ÷ Unit Price = 497,542 ÷ 3,149. ** 98,45 = 100 – 1,55

We have summarized all the indicators and their formulas from the article in a diagram.

Figure 4. Profitability threshold, financial safety margin and operating leverage: calculation formulas

1.2.3. Key financial reporting documents

Section I. “Non-current assets”.

Section II. "Current assets"

Section III. "Capital and reserves"

Section IV “Long-term liabilities”

Section V “Short-term liabilities”

Section V characterizes the enterprise's liabilities that are due to be repaid less than 12 months after the reporting date and includes:

I. Income and expenses from ordinary activities.

II. Operating income and expenses.

III. Non-operating income and expenses.

IV. Extraordinary income and expenses.

1.2.4. Financial Statement Ratios

Topic 1.3. Cash flows: analysis and management basics

1.3.1. Concept and types of cash flows

1.3.2. Cash flow classification

Distribution of cash flows by type of activity of the enterprise

1.3.3. Net cash flow and methods for its assessment

1.3.4. Cash flow analysis

1.3.5. Cash flow optimization methods

Module II. Organizational asset management

Topic 2.1. Total assets of an organization and methods for estimating their value

2.1.1. Economic essence and classification of assets

2.1.2. The concept of an integral property complex and its assessment

Costs

2. Replacement cost method (“cost” method)

4. Method for estimating future net cash flow.

2.1.3. Assessment of property status and efficiency of use

Total assets

Indicators for assessing the property status of an organization

Topic 2.2. Non-current assets management

2.2.1. Essence and classification of non-current assets

Classification of non-current assets

2.2.2. Stages of non-current assets management

Rationale

2.2.4. Leasing as an unconventional method of financing the renewal of non-current assets

Leasing payments and methods of their calculation

Topic 2.3. Current assets management

2.3.1. Essence, composition and classification of current assets

2.3.2. Turnover of current assets. The concept of operating and financial cycles

2.3.3. Current assets management policy: goals and approaches

2.3.4. Enterprise inventory management

Optimization of order batch (delivery)

Optimization of inventory volumes

2.3.5. Accounts receivable management

Enterprise credit policy

2.3.6. Money Asset Management

Monetary assets

Methods for optimizing the average balance of monetary assets

Forms of regulation of the balance of monetary assets

Module III. Organizational capital management

Topic 3.1. Capital and its valuation

3.1.1. Economic essence and classification of capital

3.1.2. The price of capital and its impact on the market value of the organization

3.1.4. Weighted average and marginal cost of capital

Topic 3.2. Capital structure management.

3.2.1. The concept and significance of capital structure in assessing financial

Organization states

3.2.2. Capital structure theories

3.2.3. Capital structure optimization methods

3.2.4. Financial leverage

I concept of financial leverage. Western European school

Financial management

II concept of financial leverage. American school

Financial leverage

Topic 3.3. Equity management

3.3.1. Own capital and its elements

3.3.3. Evaluating the effectiveness of equity capital management

3.3.4. Operating leverage as a method of profit management

Operational (production) lever

Profitability threshold

Procedure for constructing a graph

Financial strength margin

3.3.5. Entrepreneurial risk. Interaction between financial and

Operating leverage

3.3.6. Dividend policy of the enterprise

Basic theories of dividend policy

Topic 3.4. Debt capital management

3.4.1. Concepts, composition and features of borrowed capital

3.4.2. Valuation of individual elements of borrowed capital

The cost of a financial loan from banks and other organizations

Cost of a bond loan

Cost of commodity (commercial) loan

3.4.3. Internal accounts payable management

Assessment of the effect of the increase in domestic accounts payable in the coming period

Topic 11. Mergers and acquisitions in fm.

Glossary of basic terms

As can be seen from the calculations, sales revenue increased by 9.1%, and profit by 77%.

When solving the problem of profit maximization, you can increase or decrease not only variable, but also fixed costs and, depending on this, calculate by how much the profit will increase.

Operating leverage force determined by the formula:

where is the force of influence of the operating lever;

Gross margin (fixed costs + profit), in economic literature this indicator is called the coverage amount.

In our example, F 0 = (11 million rubles – 9.3 million rubles) : 0.2 = 8.5.

The number 8.5 means that with a possible increase in sales revenue, for example by 3%, profit will increase by 3%8.5=25.5%.

If sales revenue decreases by 10%, profit will decrease by 10%8.5=85%, and an increase in revenue by 9.1% will give an increase in profit by 9.18.5 by 77% (see above calculation).

The operating leverage formula allows us to answer the question of how sensitive the gross margin is to changes in product sales volume.

The higher the fixed costs and the lower the profit, the stronger the operating leverage.

The strength of the operating leverage indicates the degree of business risk; the greater the force of influence, the higher the business risk.

makes it possible to determine the amount of profit depending on changes in revenue.

Profitability threshold
Profitability threshold- this is such sales revenue at which the enterprise covers its costs of production and sales of products without making profits and losses. The gross margin is only enough to cover fixed costs, and the profit is zero.
More often, the profitability threshold is determined graphically.
Price – 0.5 thousand rubles. for 1 piece
Sales volume – 4,000 pcs.
Fixed costs – 550 thousand rubles.
Variable costs – 1,300 thousand rubles. (0.325 thousand rubles per 1 piece)
Profit – 150 thousand rubles.
Procedure for constructing a graph

1. Direct proceeds from sales – OA.

Revenue = Sales price  Sales volume = 0.5 thousand rubles.  4,000 units. = 2,000 rub.

2. Direct fixed costs (horizontal at the level of 550 thousand rubles).

3. OE – direct variable costs.

4. The straight line of the total costs of the aircraft is parallel to the straight line of the variable costs, raised to a height = 550 thousand rubles. or 0.325  4,000 + 550=1,850 rub.

The intersection point (K) of direct revenue (OA) and total costs (BC) will be the profitability threshold, which will indicate the critical (threshold) volume of output at which income covers expenses without making a profit (break-even point).

In our example, the critical sales volume will be 3,142 units.

The profitability threshold can also be determined using the formula:

where are fixed costs;
Percentage of gross margin to sales revenue.
In our example
thousand roubles. or
thousand roubles.
The figure is 3143m units. – threshold quantity of goods. Each subsequent unit of goods will bring profit.
To determine the amount of profit after passing the profitability threshold, it is enough to multiply the quantity of goods sold in excess of the critical volume by the specific value of the gross margin in each unit of goods.
For example.
Mass Profit after Product Quantity, Gross Margin
passing the threshold = sold after  Total quantity (3.17)
passing the threshold of sold goods
profitability
The strength of the impact of operating leverage is maximum near the profitability threshold and decreases as sales revenue and profit grow, since the share of fixed costs in their total amount decreases until the next “jump” in fixed costs.
Financial strength margin
Financial strength margin– this is the difference between the achieved actual revenue from product sales and the profitability threshold.
Stock Revenue Threshold
financial = from – profitability (3.18)
implementation strength
For our example:
Sales proceeds – 2,000 thousand rubles.
Profitability threshold – 1,571 thousand rubles.
or 21% in relation to revenue.
Or according to the second formula:
,
where is the force of influence of the operating lever.
. (3.19)
As follows from the calculations, the company is able to withstand a decrease in revenue by 21% without threatening its financial position. If an enterprise has a high margin of financial strength (>10%), this indicates a favorable operating leverage (with an optimal share of fixed costs) and a high level of profitability. Such an enterprise is attractive to investors, lenders, and insurance companies. The greater the share of fixed costs in the cost price, the more significant the relationship between sales revenue and income. For enterprises with bulky core income, high operating leverage poses a danger, since in unstable economic conditions (falling effective demand, inflation), every % decrease in revenue results in a catastrophic drop in profits. Automation leads to increased costs and, consequently, increased operating leverage and business risk. Thus, there are both positive and negative sides automation. There is no clear answer to the question of what is more profitable: having high variable costs and low constants, or vice versa. Each company has its own answer. It depends on financial goals, starting position and other circumstances.
3.3.5. Entrepreneurial risk. Interaction between financial and
Operating leverage
Business risk is associated with loss of profit as a result of a decrease in sales volume or an increase in costs due to: a) instability of demand; b) fluctuations in prices for finished products; c) increase in the cost of purchasing raw materials and material resources.
The degree of business risk is determined by the strength of the operating leverage, which in turn depends on the share of fixed costs in the cost of production. The lower the volume of products sold, the higher specific gravity fixed costs in its cost. The level of fixed costs does not decrease during periods of falling demand for products, but on the contrary, so business risk increases.
Financial risk depends on credit conditions (price of borrowed funds) and capital structure and is caused by the inability to repay the loan and accrue dividends.
Economic instability leads to an increase in interest on borrowed capital and an increase in dividends on ordinary shares, since they require sufficient compensation for the risk in the event of liquidation of the enterprise. The degree of financial risk is determined by the level financial leverage.
Both risks are interconnected, as are both levers.
Shortage of profit as a result of business risk leads to the inability to pay interest on the loan and accrue dividends - financial risk increases, the effect of financial leverage decreases. An increase in interest rates associated with changes in monetary policy, the riskiness of the project, and the existing capital structure leads to a “weighting” of the constant part of costs and has an increased impact on the strength of operating leverage.
Operating leverage affects the amount of profit received, and financial leverage determines the share of net profit per 1 share (dividend), as well as the level of net profit per 1 ruble of equity capital (profitability equity).
Therefore, as the impact of operating and financial leverage simultaneously increases, minor changes in revenue volume lead to significant changes in revenue volume.
This is expressed in the formula for the conjugate effect of operating and financial leverage (the strength of the impact of financial leverage is calculated on the basis of Concept II).
where is the effect of conjugate levers;
Operating leverage force;
The power of financial leverage.
This formula allows you to assess the level of total risk associated with the enterprise and answer the question: by what percentage will net profit per share change if sales volume changes by 1 percent.
The combination of powerful financial leverage with powerful operating leverage can be disastrous for an enterprise, since business and financial risks multiply, exacerbating the negative aspects in the enterprise's activities.
3.3.6. Dividend policy of the enterprise
Dividend policy is component general profit management policy not only joint stock company, but also enterprises of other organizational and legal forms; only instead of the terms “dividend”, “share”, “contribution”, “profit on contribution” will be used, but the mechanism for paying income to owners is the same.
The choice of dividend policy is of utmost importance for the enterprise, as it affects the following indicators:

market value of the enterprise;

depositors' welfare;

prospects for the development of the enterprise;

prestige of the enterprise in the real estate market;

investment attractiveness.

investment opportunities of the enterprise;

cost of raising additional capital;

the presence of a reserve of own funds formed in the previous period;

availability of loans on the market;

level of taxation of dividends, property, profits;

financial leverage effect;

liquidity (lack of Money makes it difficult to pay dividends; an enterprise can take out a loan to pay dividends, but this is extremely unprofitable);

the level of dividend payments of competing firms (a low level of dividends can lead to a massive “dumping” of shares; there may be a risk of the enterprise being captured by a competitor).

Profitability threshold- this is such sales revenue at which the enterprise does not have a loss, but does not yet have a profit.

The profitability threshold is an indicator characterizing the volume of product sales at which the enterprise's revenue from the sale of products (works, services) is equal to costs. This is the sales volume at which the business entity has neither profit nor loss.

Analysis of the profitability threshold is carried out in the FinEkAnalysis program in the block Calculation of the break-even point using operating leverage.

Profitability threshold formula

The profitability threshold is determined by the formula:

Synonyms

break-even point, solvency point, critical sales volume

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(Profitability Threshold)

- the volume of production (sales) at which the enterprise covers all its expenses without making a profit. The term is also used profitability threshold.

The value of this indicator plays an important role in the issue of sustainability and solvency of the company. The degree to which sales volumes exceed the profitability threshold determines the (stability margin) of the enterprise. In turn, how profit grows with changes in revenue.

Formula for calculating break-even point

To calculate, you need to divide the costs into two components:

- increase in proportion to the increase in production (sales volume). For example: costs of raw materials and supplies. In the simplest case, these are the costs of purchasing goods.
- do not depend on the number of products produced (goods sold) and on whether the volume of operations grows or falls. For example: rent, management salaries.

Let us introduce the following notation:

IN	—	sales revenue.
Rn	—	sales volume in physical terms, in pieces, meters, kilograms, etc.
Zper	—	total variable costs.
Zpost	—	fixed costs.
C	—	unit price.
ZSper	—	average variable costs per unit of output.
TBd	—	break-even point in monetary terms.
TBn	—	break-even point in physical terms.

Formula for calculating the profitability threshold in monetary terms:

(in rubles, dollars, etc.)

TBd = V*Zpost/(V - Zper)

Calculation formula in physical terms:

(in pieces, kilograms, meters, etc.)

TBn = Zpost / (C - ZSper)

Example of calculating the break-even point and chart

Zpost	=	300 - fixed costs
C	=	25 — price per unit of production (per piece).
ZSper	=	10 - variable costs per unit of production

Profitability threshold in physical terms:

TBn = 300/(25-10) = 20 (pcs.)

The meaning of the indicator is more clearly visible in the graph.

On the horizontal axis - the number of items sold
On the vertical axis - money

Red - total costs (Zper + Zpost)
Blue - income (revenue)
Green - profit

As you know, there are several types of profit: gross; operating room; before taxes; clean; before interest, taxes and depreciation (EBITDA), etc. In this case, this is operating profit.

What does the break-even point chart show us?

The break-even point increased to 40.
The total cost line has moved up, this is caused by an increase in fixed costs. Its slope has not changed, since the slope depends on variable costs.
The distance between the Marginal Income line and the profit line has increased, this is caused by an increase in fixed costs.

It can be concluded

An increase in fixed costs leads to an increase in the break-even point, that is, to reach break-even, you need to sell more units of goods. This is bad for business.
Accordingly, their reduction leads to a decrease in the break-even point; to reach break-even, fewer units of goods must be sold. This is good for business.

Example 3. Graph of the profitability threshold with an increase in variable costs

Now let's increase variable costs to 20 units. Constant 300, price 25.

The break-even point increased to 60.
Compared to the original option, the slope of the total cost line has increased; the income line catches up with it only by 60. The slope depends on variable costs.
The slope of the profit line has decreased and it is growing more slowly. The slope is determined by the difference between price and variable costs. In the original version this difference is 15 (25-10), in this example the difference is 5 (25-20).

Conclusion: the break-even point increases as variable costs increase and decreases as they decrease.

Example 4. Graph for decreasing price

Let's reduce the price to 20 units. Fixed expenses 300, variable 10.

The break-even point is 30.
Compared to the original option, the slope of the income and profit lines has decreased; they are growing more slowly. The slope depends on the difference between price and variable costs. In the original version this difference is equal to 15 (25-10), in this version the difference is equal to 10 (20-10).

Conclusion: the break-even point increases when the price decreases, decreases when the price increases.

The break-even point depends on three parameters - fixed and variable costs, price. In our examples, each time we changed only one parameter compared to the original version.

In practice, one is interested in the behavior of the profitability threshold when several parameters change, for example: how to compensate for an increase in variable costs by increasing the price or reducing fixed costs. Excel spreadsheets are useful for quickly calculating possible options and assessing the impact of different cost-price ratios.

Profitability threshold

AND profitability threshold these are synonyms. But profitability is relative indicator profitability and is usually expressed as a percentage of invested funds or as profit per unit of invested funds or per unit of output. In this regard, it is interesting to see what the break-even point graph looks like when converted to a unit of production.

In the graph below, as in the original version, fixed costs are 300, variable costs per unit of production are 10, price is 25, profitability threshold TBn = 20 pieces.

When recalculated per unit of production, we see that some constant quantities have turned into variables and vice versa. Some straight lines turned into curves.

The proportion of variable costs is constant for each unit of production.
As volume increases, a smaller and smaller share of fixed costs per unit of production occurs. Therefore, the fixed cost line goes down.
As a result, the total cost per unit of production (cost) decreases.
With a production volume of 20 pcs. the cost line crosses the price line (cost equals price) and then goes below it.
Accordingly, the profit line passes through 0, the profit becomes positive.
At the point of the profitability threshold, the line of fixed costs intersects the line of marginal profit (marginal income), i.e. marginal income equals fixed costs. Further, the marginal profit line goes above the fixed cost line - profit appears.

Difficulties in calculating the break-even point

It seems that the break-even point formula is quite simple, and there should be no difficulty in calculating it. But the matter is complicated by the fact that several important assumptions were made when deriving the calculation formula.

Four assumptions when calculating the break-even point

The calculation formula uses the difference between revenue (sales volume) and variable costs or the difference between product prices and variable costs per unit of production. That is, the difference between the proceeds from the sale and the funds spent on the production or purchase of products is used. Therefore it is believed that all for sale produced or purchased products. Warehouse inventories are not taken into account since no revenue is received from their sale.
Variable costs are directly proportional (linear) dependent from sales volume. This doesn't always happen. For example, the case where in order to increase production volume it was necessary to build a new workshop will have to be calculated in a more complex way.
Fixed costs do not depend from sales volume. This doesn't always happen either. If, in order to increase production volume, it was necessary to build a new workshop, hire more management personnel, increase pay utilities- this case also does not fit the general formula.
Break-even point is calculated for the enterprise as a whole or for some average product.

When calculating the break-even point, the most important limitation is assumption 4. In order to make the calculation not on average, but for each product separately, you need to know what share of fixed costs falls on each product. We need a method for allocating fixed costs to individual products. In addition, if there are many products, calculating break-even points separately for each product turns into a complex task that requires a large amount of calculations.

DEFINITION

It represents the enterprise’s revenue (volume of products sold or produced), at which full coverage of fixed and variable costs for the implementation of this production will be ensured. In this case, the profit will be zero. The profitability threshold is often called the break-even point, the critical sales (sales) threshold.

The profitability threshold formula has great value when implementing efficient work enterprise. The value of the profitability threshold reflects the amount of products that need to be produced or sold to cover all costs. The profitability threshold is the volume of goods or services at which the enterprise’s profit is zero and it does not incur losses.

The profitability threshold indicator is calculated from different positions:

Reflects the state of the enterprise in which it does not make a profit, but can function;
Determines the barrier, upon crossing which the company will begin to make a profit or go to a loss.

Profitability Threshold Formula

Any enterprise can determine the profitability threshold in two ways:

In monetary terms (for example, in rubles),
In physical terms (in pieces).

Profitability threshold formula in monetary expression looks like this:

Here PR is the profitability threshold,

Vyr – amount of revenue,

Zpost – the amount of fixed costs,

Zper – the sum of variable costs.

In physical terms, the profitability threshold formula looks like this:

PR = W post / (C - NW lane)

Here C is the price per unit of production,

SZper – average variable costs for the production of each unit of production.

Graphic determination of the profitability threshold

Most often, along with the profitability threshold, a graphical method is used to determine it. The graphic image allows you to clearly display the situation of business efficiency growth or its decrease.

In order to build a graph you need to do the following:

Calculation of the profitability threshold for several sales volumes (production),
Mark all the points on the graph and connect them into a unifying curve.

Profitability threshold value

The profitability threshold formula is most often used when forecasting profits financial condition companies.

Each entrepreneur must strive to achieve a position where revenue exceeds the profitability threshold, while in physical terms the quantity of goods produced must exceed the threshold value. If these conditions are met, the company can begin to increase profits.

It is important to note that the strength of the production lever increases as production approaches the profitability threshold, and vice versa. This means that there is a certain limit for exceeding the profitability threshold, which will certainly be followed by a sharp increase in fixed costs (purchase of new means of labor, new premises, increase in management costs).

Each new enterprise must necessarily pass the threshold of profitability, taking into account that following an increase in the amount of profit, a period of the need for a sharp increase in fixed costs will inevitably come. This will lead to a reduction in profits received in the short term.

Examples of problem solving

EXAMPLE 1

Exercise

The company worked the previous period in accordance with the following indicators:

Number of products produced – 1500 pieces,

Price per unit of production – 985 rubles,

Fixed costs – 420,000 rubles,

Variable costs per unit of production – 160 rubles.

Determine the profitability threshold.

Solution

First of all, we determine the company’s revenue by multiplying the quantity of products by its price:

Exp = 1500 * 985 = 1477500 rubles

Zper = 1500*160 = 240,000 rubles.

The profitability threshold for solving this problem looks like this:

PR = Vyr * Z post / (Vyr - Z lane)

PR = 1477500*420000/1477500-240000=501454.5 rubles

Conclusion. We see that with a sales volume of 501,454.5 rubles, the company will break even, that is, it will not incur losses, but will not make a profit either.

Answer

Profitability threshold = 501454.5 rubles.