Break-even point Almost every manager sets a goal before opening a new business – to quickly recoup investments and start making a profit. The break-even point can help get closer to this goal.
In other words, the break-even point is one of the most important indicators that demonstrates:
- how profitable will the company be given the given parameters;
- What is the plan and what nes to be done to “break even” and generate income.
What is the breakeven point and the purposes of its calculation
The break-even point (BEP) is a certain volume of sales of goods or services at which the enterprise’s income is equal to all its costs. The break-even point is more like a kind of threshold. Additional sales above this threshold allow you to make a profit. For entrepreneurs, understanding this indicator and taking it into account are essential elements of business management.
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A project is a necessary action for every entrepreneur. There are several personal calculation options. Before considering the formulas for calculating the break-even point, you should understand what indicators they consist of and what each of them is responsible for.
Break-even point parametersIn order to successfully
you ne to know the following parameters:
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1. Unit price. This is the price at which a company sells its goods or services.
2. Revenue. The monetary equivalent of the total amount of goods and services sold for a certain period of work.
3. Variable costs. Costs that change proportionally with the increase or decrease in production volume. The more goods sold, the higher the costs. These include costs for raw materials, materials, hourly wages for production workers. That is, everything that is directly relat to the manufactur products.
4. Fix costs. Costs that do not depend on changes in production volumes and sales of products. That is, these are fix costs that the company pays even if it has not produc a single unit of goods or has not found customers.
5. Marginal profit . The amount of revenue from which the entire amount of variable costs has been subtract.
The break-even point can be calculat in different ways. Everything will depend on the goals, as well as the data you know. In addition to the above, to calculate the break-even point you will ne:
- production volume in natural units: in pieces, kilograms, liters;
- Variable cost per unit: all variable costs or the quantity of output produc.
Break-even point formula: types and calculation options
In practice, two options for calculating the break-even point are us to analyze the position of any business: in physical and monetary terms. Let’s look at each of them in more detail.
In kind
The main way to quickly calculate the breakeven point is in physical terms. You can calculate how many kilograms, liters or pieces of goods you ne to sell in order to cover all variables, as well as fix costs.
In monetary terms
If you have a multi-profile business, you sell several different buy swen phone data products or services, then you do not ne to calculate the break-even point separately for each. In such cases, the entire range of goods is equat to conventional units or monetary equivalent. And the break-even point is calculat for each product in total.
In this case, the break-even point calculation is a little more difficult to use. The formula for the calculation will help you understand how much you ne to sell in order to cover all variable and fix costs and make a profit.
To calculate the break-even point in monetary terms, you ne to:
- As before, first calculate the fix costs.
- Then calculate the variable costs for the entire volume of manufactur products.
- Next, you ne to calculate the total margin ph numbers using the formula: “Revenue” – “Variable Costs”.
- Find TBU using the formula.
This formula can also be shorten and present as: Break-even point = Fix costs / Marginality. Let’s look at an example to understand how to find TBU.
It is convenient to calculate the break-even point in Excel. There you can set up formulas and periodically update the data, Excel will calculate everything automatically.
Breakeven point graph
Another way to determine the break-even point of an enterprise is a graphical one. It is consider more convenient and visual, so many entrepreneurs are us to working with it.
