Calculate your break-even point
5
(4)

CALCULATE YOUR BREAK-EVEN POINT - BREAK-EVEN POINT - BREAK-EVEN POINT - BEP

Accelerate your business with these expert tips on "Calculate your break-even point". Analyse and discover this TIP!

It is the situation we reach when the sales volume is sufficient to cover all costs (not investment, only variable + fixed costs). We can also express it as the minimum number of units that a company needs to sell so that the profit at that time is zero. For entrepreneurs, this is a very important objective or milestone to reach, it is our goal, to achieve growth in customers until all costs are covered. 

Where do we see it clearly reflected in the break-even point?

In the variation of the cash flow (see+) without putting in any funding. See also this TIP (+). The break-even point occurs at the point where your ending cash balance goes from decreasing to increasing, it is the turning point in your valley of death (+). The company will be profitable or not, depending on the number of products it markets, and depending on whether all of them together contribute to generating profits through diversification of the product portfolio. It determines the production and sales volume that must be achieved in order to achieve equality between revenues and costs, so that the company does not generate losses. We can only be sure that the company is profitable if the company markets only one product, and this product has managed to reach the break-even point.

The information to be known is: unit variable cost, unit price, fixed costs, sales volume.

Profitability Threshold Ratio = (Fixed costs) / (Unit contribution margin)

The formula by which the break-even point is expressed is as follows:

Qc = CF / (PVu - CVu)

WHERE:

  • Qc = breakeven point = No. of units produced and sold for Profit to be equal to zero
  • CF = Fixed costs
  • PVu = Unit selling price of the product
  • CVT = Total variable costs
  • CVu = Variable unit cost
  • Bº = Profit
  • I = Total Income
  • C = Total Costs

DEVELOPMENT OF THE FORMULA:

DEAD POINT = No. of Units produced and sold by the company necessary for the Profit to be equal to zero:

Bº = I - C

If Bº = 0, then I - C = 0:

  • I = C
  • I = PVu * Qc
  • C = CF + CVT
  • CVT = CVu * Qc

From where: C = CF + CVu * Qc

Substituting:

I - C = PVu *Qc - (CF + CVT) = PVu * Qc - (CF + CVu * Qc) = PVu * Qc - CF - CVu * Qc = 0

Clearing Qc:

  • PVu * Qc - CF - CVu * Qc = 0
  • Qc * (PVu - CVu) - CF = Bº = 0
  • Qc * (PVu - CVu) = 0 + CF

From where Qc = CF / (PVu - CVu)

With this improved formula, the variable "PROFIT" (Bº) is added, which is very useful for solving problems such as: How many units does a company need to produce and sell to make a profit of xxx Euros? This is the original formula, since the point of calculating the break-even point is to give the variable "PROFIT" (Bº) a value of zero. The calculation of the breakeven point is specific to the "Direct costing" method or Direct Cost Model in Cost Accounting, since when talking about costs, these are subdivided into Fixed Costs and Variable Costs, not being applicable to other costing models, such as the ABC Model (Activity Based Cost - costs are allocated to the activities carried out in the production process) or the Full Cost Model (Full Cost Model).

Break-even analysis is based on a number of conditions, without which the analysis cannot be properly conducted:

The unit variable cost remains constant for any production volume, without exception. We are in a perfectly competitive market, which means that all units can be sold at that price.

Practical examples of deadlock calculation

Suppose a company has the following data:

  • Monthly fixed costs: $10,000
  • Variable costs per unit: USD 5
  • Selling price per unit: $20

To calculate the break-even point for this company, we must first determine the contribution margin per unit:

  • Contribution margin = Selling price - Variable cost per unit
  • Contribution margin = 20 - 5 = USD 15 per unit
We can then calculate the break-even point in units:
  • Break-even point in units = Fixed costs / Contribution margin
  • Break-even point in units = 10,000 / 15 = 666.67 units

Therefore, the company will have to sell at least 666.67 units per month to cover its costs and expenses and generate neither profit nor loss.

We can also calculate the break-even point in money:
  • Break-even point in money = Break-even point in units x Selling price
  • Break-even point in cash = 666.67 x 20 = 13,333.33 dollars

The company must then turn over at least $13,333.33 per month to cover its costs and expenses and start generating profits. This is just one example of how a company's break-even point is calculated. Each business will have different costs and expenses, and specific calculations will need to be made for each case.

APPLY THIS TIP TO YOUR PROJECT

QUIZZ

THINK ABOUT YOU

THINK ABOUT HELPING OTHERS

Rate this TIP!

Click on the stars to rate

Rating "4" - Average " - Average5"

No votes yet, be the first to vote!

We are sorry you did not find it useful.

Help us improve this TIP!

Leave us a comment and tell us how you would improve this TIP

Copyright © mentorDay. Reproduction in whole or in part is permitted only to help entrepreneurs free of charge, always naming the author. "mentorDay"

  • mentorVIRTUAL: Soy tu mentorVIRTUAL. ¿alguna pregunta?

La respuesta tardará unos 20 segundos. Generando respuesta ...

ISSUES

COMENTARIOS
Todos los Comentarios
COMENTARIOS

Ir al contenido