The threshold of profitability is an important indicator that characterizes the financial condition of the enterprise. We calculate it in Excel, using a graphical method and using formulas.
How to understand where the border lies, beyond which the enterprise will move from a loss-making zone to a profitable one? To understand this will help the threshold of profitability. 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 safety and operating leverage. Download the Excel model and do the calculation according to your data.
This is an indicator that gives an idea of how many products, works or services need to be produced in order to pay off the company's expenses for ordinary species activities. In other words, in this case, the profit from sales is zero, as well as losses. Otherwise, it is also called profitability. entrepreneurial activity or breakeven point.
The indicator characterizes the company from different angles. On the one hand, it reflects the state of the organization, in which the enterprise does not receive profit, but also does not have losses. This is a satisfactory financial condition. On the other hand, it allows you to determine the volume of sales or the 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)
According to the above formula, the indicator is calculated in in kind, that is, it shows how many units of products or services need to be produced in order 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 for the reporting period, as a result we will get the value of the profitability threshold 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: the effectiveness of sales, resources expended, assets or capital. Download instructions and sample reports to check profitability certain types property and business processes.
Profitability threshold calculation 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 the revenue and variable costs for two values of sales volumes. The results obtained are plotted on a graph, where the X-axis reflects the volume of products sold, and the Y-axis shows the monetary value of revenue and costs. The chart allows you to see the position of the company, as well as to understand at what level of implementation the company begins to make a profit and when it works at a loss.
Graphically, it looks like the one shown in the diagram.
Figure 1. Threshold of profitability: graphical method
How to determine the break-even point: an example
Table 1. Initial data for the example
|
Value for Q1 2019 |
|
|
Sales volume, pcs. |
|
|
Fixed costs per unit of output |
|
|
Total Fixed Costs |
|
|
Variable unit costs |
|
|
Total variable costs |
Calculate the threshold of profitability in physical terms:
RUB 78,364 ÷ (2,999 rubles - 1,364.55 rubles) = 47.95 pcs. ≈ 48 pcs.
To reach the break-even point, the company needs to produce and sell 48 pieces of the Krokha developing music center.
Let us determine the ruble value of the same indicator. To do this, we use the second calculation formula:
(401,866 rubles × 78,364 rubles) ÷ (401,866 rubles – 182,850 rubles) = 143,787.79 rubles
It turns out that in order to reach the break-even point, the company needs to produce and sell products in the amount of 143,787.79 rubles.
If sales growth does not bring additional profit or increases it slightly, you need to find out what conditions marketing policy prevent this. To do this, it is necessary to determine the profitability of distribution channels, the rationality of the system of bonuses and discounts, and the effectiveness of commercial expenses.
Profitability threshold calculation in Excel
- determine fixed and variable costs per unit of goods, as well as sales volume;
- calculate the values of revenue, costs and profit from sales;
- find the zero value of the financial result. Revenue and natural volume of sales at this point will show the threshold of profitability.
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 that underlies - CVP (Cost-Volume-Profit). Let's take a look at how they are calculated and what they mean.
Threshold of profitability and margin of financial safety: how are they related?
The margin of financial safety is the difference between the actual or planned revenue of the enterprise and the income at the break-even point. Otherwise, it is a backlog 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 last month. So, the result of activity will increase by the marginal income from the sale of those 500 additional units.
________________
Note.
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This indicator is also called margin or margin of safety. It is calculated either in absolute terms - in rubles, or in relative terms - as a percentage. Relative value It also has another name - the safety margin ratio.
Table 2. Financial safety margin: calculation formulas
Why is the revenue in the formulas given variably: both as actual and as planned? This moment depends on the period of calculation of this indicator. If you define it by the already achieved values of income for the last month, quarter or year, then take the actual value. If you are estimating future values for revenue from the newly drawn up 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 1st quarter of 2020 is 497,542 rubles;
- for this, the price is planned to be raised by 5%;
- variable costs per unit will increase by 3%;
- fixed costs 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 safety.
Table 3. Calculation of the financial safety margin
|
Indicator (in rubles, unless otherwise indicated) |
Value for Q1 2020 |
|
Initial data |
|
|
3149 ≈ 2999 × 1.05 |
|
|
Variable cost per unit |
1405.49 = 1364.55 × 1.03 |
|
Total Fixed Costs |
98 364 = 78 364 + 20 000 |
|
Estimated values |
|
|
Profitability threshold |
179 493 ≈ 98 364 ÷ (3 149 - 1 405.49) × 3 149 ≈ 57 units. × 3 149 |
|
Margin of financial strength |
318 049 = 497 542 – 179 493 |
|
Margin of financial strength, % |
63.9 = 318,049 ÷ 497,542 × 100 |
How to interpret the obtained values of the margin of safety? 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, then there will still be no loss from this product;
- the planned sales volume is almost 64% higher than the break-even one. It turns out that the organization has a significant reserve. It can be used, for example, during marketing campaign on a product in the form of a price reduction. In addition, thanks to this reserve, the company will not drive into losses an unforeseen increase in fixed or variable costs. For example, fixed costs may increase by 177 thousand rubles. (by 80%), and still the organization will remain in the profit zone. This is clearly visible on the graph.
Figure 3. Margin of financial safety on the break-even chart
Return on investment is an indicator that allows you to evaluate the effectiveness of financial investments and their payback. From English ROI (return of investment) is translated as "return on investment". This indicator should be determined both for already open projects, and for those in which the company is only planning to invest.
Download ROI Formula
Operating lever: formula
Operating lever in simple terms is the ratio 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 what percentage the price or sales in physical terms will increase.
For operating leverage, two formulas are derived: one for price leverage, the other for natural leverage. Both of them are based on the ratio of income to financial result. Only in the first case is taken the total income from ordinary activities (revenue), 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: a price increase does not entail costs, but an increase in sales leads to this. The reason is the variable component in the costs: the higher the natural volume of sales, the greater its value.
If you know what the operating leverage is, then calculating the percentage change in profit from sales will not be difficult. It is based on formulas from Table 5.
Table 5. Impact of operating leverage on profit
Of course, it is possible to 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 is an example.
Suppose 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%. Realization, according to their expectations, will decrease by 1% in the same period. How would these changes individually affect sales revenue? Let's calculate the result using the formulas from Table 5. To do this, we additionally calculate the financial result and the total marginal income.
Table 6. Calculation of operating leverage
|
Index |
Q2 2020 value |
|
Initial data (Q1 2020) |
|
|
Revenue, rub. |
|
|
Total marginal income, rub. [(Price - Variable Cost per Unit) × Quantity] |
275474.58 = (3149 – 1405.49) × 158* |
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Profit from sales, rub. (Total contribution margin - Total fixed costs) |
177 110,58 = 275 474,58 – 98 364 |
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Estimated values |
|
|
Price operating leverage, units |
2.81 = 497542 ÷ 177110.58 |
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Natural operating lever, pcs. |
1.55 = 275474.58 ÷ 177110.58 |
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Impact on sales profit through product price, % |
8.43 = 3% × 2.81 |
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Influence on profit from sales through the price of the product, rub. |
192041 = 177110.58 × 108.43 ÷ 100 |
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Impact on sales profit through the amount of product sold, % |
1.55 = (-1)% × 1.55 |
|
Influence on sales profit through the amount 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 summarized all the indicators and their formulas from the article in the diagram.
Figure 4. Threshold of profitability, margin of financial safety and operating leverage: calculation formulas
Profitability threshold
Profitability threshold- this is such a proceeds from the sale, in which the enterprise covers its costs for the production and sale of products without making a profit and loss. Gross margin is only enough to cover fixed costs, and 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 for 1 item)
Profit - 150 thousand rubles.
The order of plotting
where - fixed costs;
Percentage of gross margin to sales revenue.
In our example
thousand roubles. or
thousand roubles.
Number 3143m units. - the threshold quantity of goods. Each subsequent unit of goods will be profitable.
To determine the amount of profit after passing the threshold of profitability, it is enough to multiply the amount of goods sold in excess of the critical volume by the specific value of the gross margin in each unit of goods.
For example.
Profit Mass after Product Quantity, Gross Margin
threshold passed = sold after Total quantity (3.17)
passing the threshold of the goods sold
profitability
The strength of the operating leverage is maximum near the profitability threshold and decreases as the sales proceeds and profits grow, since the share of fixed costs in their total amount decreases until the next “jump” of fixed costs.
Margin of financial strength
Margin of financial strength- this is the difference between the achieved actual revenue from the sale of products 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 the volume of revenue.
Or by the second formula:
,where is the force of the operating lever.
.
(3.19)As follows from the calculations, the company is able to withstand a decrease in revenue by 21% without a threat to its financial position. If an enterprise has a high margin of financial strength (>10%), this indicates a favorable value of the impact force of the operating lever (with an optimal share of fixed costs) and a high level of profitability. Such an enterprise is attractive to investors, creditors, insurance companies. The larger the share fixed costs in the cost price, the more significant is the dependence between sales proceeds and income. For enterprises with bulky basic incomes, the high strength of operating leverage is dangerous, since in unstable economic conditions (falling effective demand, inflation), every % decrease in revenue turns into a catastrophic drop in profits. Automation leads to an increase in costs, and, consequently, to an increase in the strength of the operating leverage and entrepreneurial risk. Thus, there are both positive and negative sides automation. There is no single answer to the question of what is more profitable: to have high variable costs and low fixed costs, 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 of financial and
Operating leverage
Entrepreneurial risk is associated with a loss of profit as a result of a decrease in sales or an increase in costs due to: a) volatility in demand; b) fluctuations in prices for finished products; c) an increase in the cost of purchasing raw materials and material resources.
The degree of entrepreneurial risk is determined by the strength of the operating leverage, which in turn depends on the proportion 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 the period of falling demand for products, but vice versa, therefore, entrepreneurial risk increases.
Financial risk depends on the terms of lending (the 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, as they require sufficient risk compensation in the event of liquidation of the enterprise. The degree of financial risk is determined by the level financial leverage.
Both risks are interrelated as well as both levers.
Loss of profit as a result of entrepreneurial risk leads to the inability to pay interest on the loan and accrue dividends - financial risk increases, the effect of financial leverage decreases. The growth of interest rates associated with changes in monetary policy, the riskiness of the project, the existing capital structure, leads to a "weighting" of the fixed part of the costs and has an increased impact on the strength of the operating leverage.
The operating lever affects the amount of profit received, and the financial lever determines the share of net profit per 1 share (dividend), as well as the level of net profit per 1 ruble of own funds (profitability equity).
Therefore, as the impact of operating and financial leverage increases simultaneously, small changes in revenue lead to significant changes in revenue.
This is expressed in the formula for the conjugated effect of operational and financial leverage (the strength of the impact of financial leverage is calculated on the basis of concept II).
where is the effect of conjugated levers;
Force of influence of the operating lever;
The strength of financial leverage.
This formula allows you to assess the level of the total risk associated with the enterprise, and answer the question: by what percentage will net profit change per share with a change in sales by 1 percent.
The combination of strong financial leverage with strong operating leverage can be detrimental to an enterprise, as business and financial risks multiply, exacerbating negative aspects in the enterprise's activities.
3.3.6. Dividend policy of the enterprise
The 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" will be used "share", "deposit", "profit on contribution", the same mechanism for paying income to owners is the same.
The choice of dividend policy is of the utmost importance for the enterprise, as it affects the following indicators:
As can be seen from the calculations, sales revenue increased by 9.1%, and profit by 77%.
Solving the problem of profit maximization, it is possible to increase or decrease not only variable, but also fixed costs and, depending on this, calculate by how much% the profit will increase.
Operating lever force is determined by the formula:
where is the impact force of the operating lever;
Gross margin (fixed costs + profit), in the economic literature, this indicator is called the amount of coverage.
In our example, F 0 \u003d (11 million rubles - 9.3 million rubles): 0.2 \u003d 8.5.
The number 8.5 means that with a possible increase in sales proceeds, for example, by 3%, the profit will increase by 3%8.5=25.5%.
With a decrease in sales revenue by 10%, the profit will decrease by 10%8.5=85%, and an increase in revenue by 9.1% will give an increase in profit by 9.18.5 by 77% (see above calculation).
The operating leverage formula allows you to answer the question of how sensitive the gross margin is to changes in sales volume.
The higher the fixed costs and the lower the profit, the stronger the operating leverage.
The strength of the impact of the operating lever indicates the degree of entrepreneurial risk, the greater the impact, the higher the entrepreneurial risk.
makes it possible to determine the amount of profit depending on the change in revenue.
1. Direct sales proceeds - OA.
Revenue = Selling price Sales volume = 0.5 thousand rubles. 4,000 units = 2,000 rubles.
2. Direct fixed costs (horizontal at the level of 550 thousand rubles).
3. OE - direct variable costs.
4. The direct line of total aircraft costs is parallel to the direct line of variable costs raised to a height = 550 thousand rubles. or 0.325 4,000 + 550 \u003d 1,850 rubles.
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 threshold of profitability can also be determined by the formula:
the market value of the enterprise;
welfare of depositors;
prospects for the development of the enterprise;
prestige of the enterprise in the real estate market;
investment attractiveness.
investment opportunities of the enterprise;
the cost of raising additional capital;
the presence of a reserve of own funds formed in the previous period;
availability of loans in the market;
the level of taxation of dividends, property, profits;
the effect of financial leverage;
liquidity (lack Money makes it difficult to pay dividends; an enterprise can take a loan against the payment of 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 a company being taken over by a competitor).
| " |
Profitability threshold- this is such sales revenue, in which the company has no loss, but still no profit.
The profitability threshold is an indicator characterizing the volume of sales of products, at which the company's revenue from the sale of products (works, services) is equal to costs. This is the volume of sales at which the business entity has neither profit nor loss.
Profitability threshold analysis is performed in the FinEcAnalysis 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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(Profit threshold)
- the volume of production (sales) at which the enterprise covers all its costs without making a profit. The term is also used profitability threshold.
The value of this indicator plays an important role in the sustainability and solvency of the company. The degree of excess of sales volumes over the threshold of profitability determines the (resilience margin) of the enterprise. In turn, how profit grows with a change in revenue shows.
Break Even Point Formula
For the calculation, it is necessary to divide the costs into two components:
- - increase in proportion to the increase in production (sales volume). For example: the cost of raw materials and materials. In the simplest case, this is the cost of purchasing goods.
- - do not depend on the number of products produced (goods sold) and on whether the volume of operations is growing or falling. For example: rent, salaries of management personnel.
Let us introduce the notation:
| IN | — | sales revenue. |
| pH | — | 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. |
The formula for calculating the profitability threshold in monetary terms:
(in rubles, dollars, etc.)
TBd \u003d V * Zpost / (V - Zper)
Calculation formula in physical terms:
(in pieces, kilograms, meters, etc.)
TBn \u003d Zpost / (C - ZSper)
Break-even point calculation example and chart
| Zpost | = | 300 - fixed costs |
| C | = | 25 - price per unit of production (per piece). |
| ZSper | = | 10 - variable costs per unit of output |
Threshold of profitability in physical terms:
TBn \u003d 300 / (25-10) \u003d 20 (pcs.)
More clearly, the meaning of the indicator is visible on the graph.
- Axes:
- On the horizontal axis - the number of products sold
- On the vertical axis - money
- Lines on the chart:
- 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 income.
What does the break-even point chart show us?
- As seen on the chart:
- The break-even point has increased to 40.
- The line of total costs 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 break even, more units of goods must be sold. It's 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. It's good for business.
Example 3. Graph of the profitability threshold with an increase in variable costs
Now let's increase the variable costs to 20 units. Permanent 300, price 25.
- As seen on the chart:
- The break-even point has increased to 60.
- Compared to the original version, 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, 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 rises when variable costs increase and decreases when they are reduced.
Example 4. Chart when the price decreases
Let's reduce the price to 20 units. Fixed costs 300, variable 10.
- As seen on the chart:
- The breakeven point is 30.
- Compared to the original version, 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 15 (25-10), in this version, the difference is 10 (20-10).
Conclusion: the break-even point rises when the price decreases, decreases when the price increases.
The break-even point depends on three parameters - fixed and variable costs, prices. In our examples, we changed only one parameter each time compared to the original version.
In practice, we are 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 options and evaluating the impact of different cost/price ratios.
Profitability threshold
AND profitability threshold they are synonyms. But profitability is relative indicator return and is usually expressed as a percentage of invested funds or as a profit per unit of invested funds or per unit of output. In this regard, it is interesting to see what the break-even point chart looks like when converted to a unit of output.
In the graph below, as in the original version, fixed costs are 300, variables per unit of production are 10, price is 25, the profitability threshold is TBn = 20 pieces.
When recalculated per unit of production, we see that some constant values have turned into variables and vice versa. Some straight lines have turned into curves.
- The graph shows that:
- The share of variable costs is constant for each unit of output.
- As volume increases, there is a decreasing share of fixed costs per unit of output. So the fixed cost line goes down.
- As a result, the total cost per unit of production (cost) decreases.
- With a release volume of 20 pcs. the cost line crosses the price line (cost is equal to price) and then goes below it.
- Accordingly, the profit line passes through 0, the profit becomes positive.
- At the profitability threshold point, the line of fixed costs crosses the line of marginal profit (marginal income), i.e. contribution margin 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. But the matter is complicated by the fact that several important assumptions were made in the derivation of the calculation formula.
Four Assumptions in Calculating the Break-Even Point
- The calculation formula uses the difference between revenue (sales volume) and variable costs, or the difference between product price and variable costs per unit of output. 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 considered that all produced or purchased products. Warehouse stocks are not taken into account, since the proceeds from their sale are not received.
- Variable costs are directly proportional (linearly) dependent from sales volume. This is not always the case. For example, the case when a new workshop had to be built to increase the volume of output will have to be calculated in a more complicated way.
- Fixed costs do not depend from sales volume. This also does not always happen. If, in order to increase the output, it was necessary to build a new workshop, hire more management personnel, increase pay utilities- This case also does not fit the general formula.
- The breakeven 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. To make the calculation not averaged, but for each product separately, you need to know what proportion of fixed costs falls on each of the products. We need a methodology 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 lot of calculations.
DEFINITION
Represents the company's revenue (the volume of products sold or produced), which will ensure full coverage of fixed and variable costs for the implementation of this production. In this case, the profit will be zero. The profitability threshold is often called the break-even point, the critical threshold for sales (sales).
The profitability threshold formula has great value in the implementation effective work enterprises. The value of the profitability threshold reflects the amount of products that need to be produced or sold to cover all costs. The threshold of profitability is the volume of goods or services at which the profit of the enterprise 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;
- It defines the barrier, when passing through which the company will start to make a profit or go at 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 threshold of profitability,
Vyr - the amount of revenue,
Zpost - the amount of fixed costs,
Zper - the sum of variable costs.
In physical terms, the profit margin formula looks like this:
PR \u003d Z post / (C - NW lane)
Here C is the price of a unit of production,
SZper - average variable costs for the production of each unit of output.
Graphical determination of the profitability threshold
Most often, along with the profitability threshold, a graphical method for determining it is used. The graphic image allows you to visually display the situation of growth in business efficiency or its decrease.
In order to build a graph, you need to do the following:
- Calculation of the profitability threshold for several volumes of sales (output),
- 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 in profit forecasting. financial condition companies.
Each entrepreneur must strive for a situation where revenue exceeds the profitability threshold, while in physical terms the amount of goods produced must exceed the threshold value. If these conditions are met, the company will be able to start increasing profits.
It is important to note that the impact of the production lever increases with the approach of production to the threshold of profitability, and vice versa. This means that there is a certain limit of exceeding the threshold of profitability, which will certainly be followed by a sharp increase in fixed costs (purchase of new labor tools, new premises, an increase in management costs).
Every new enterprise must necessarily pass the threshold of profitability, given that after the increase in the mass of profits, there will inevitably come a period of the need for a sharp increase in fixed costs. This will lead to a reduction in short-term profits.
Examples of problem solving
EXAMPLE 1
| Exercise | The company worked out the previous period in accordance with the following indicators: Quantity of manufactured products - 1500 pieces, Price per unit of production - 985 rubles, Fixed costs - 420,000 rubles, Variable costs per unit of production - 160 rubles. Determine the threshold of profitability. |
| Solution | First of all, we determine the revenue of the enterprise by multiplying the number of products by its price: Vyr \u003d 1500 * 985 \u003d 1477500 rubles Zper \u003d 1500 * 160 \u003d 240,000 rubles. The profitability threshold for solving this problem looks like this: PR \u003d Vyr * Z post / (Vyr - Z lane) PR \u003d 1477500 * 420000 / 1477500-240000 \u003d 501454.5 rubles Conclusion. We see that with a sales volume of 501,454.5 rubles, the company will go to zero, that is, it will not incur losses, but it will not make a profit either. |
| Answer | Threshold of profitability = 501454.5 rubles. |
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