The break-even point is used to determine the minimum volume of sales that the company must make in order not to lose or win.
At the equilibrium point of a business, sales are equal to costs and expenses. Increasing the level of sales makes profit, and decreasing results in loss.
Costs should be classified:
- Fixed costs: They are those that invariably cause with any level of sales. Variable costs: They are those carried out proportionally with the level of sales of a company.
Formula to calculate the breakeven point
| Break-even sales = Fixed Costs x | |
| one | |
| one - | Variable costs |
| Sales |
Example: In the year 200x, the company XYZ had sales income of $ 6,750,000, in the same period its fixed costs were $ 2,130,000 and variable costs were $ 3,420,000
| Break-even sales = $ 2,130,000 x | |
| one | |
| one - | $ 3,420,000 |
| $ 6,750,000 |
Break-even sales = $ 4,346,938
The sales level to neither win nor lose is $ 4,346,938, this is the break-even point for the company.
Fixed cost remains unchanged, regardless of sales volume, while variable cost is directly related to revenue or sales volume.
The percentage of the variable cost at the break-even point is given by the relationship between the variable costs and the level of sales, thus:
| Variable cost percentage = | Variable cost | x 100 |
| Sales |
| Variable cost percentage = | $ 3,420,000 | x 100 |
| $ 6,750,000 |
Variable costs at the break-even point are $ 4,346,938 X 51% = $ 2,216,938
Balance point check
| Sales | 4,346,938 |
| (-) Variable costs | 2,216,938 |
| = Gross Profit on Sales | 2,130,000 |
| (-) Fixed costs | 2,130,000 |
| = Net income | 0 |
Balance point application
In practice, the break-even point is used to calculate the volume of sales that a company must make to obtain a certain percentage of profit. The formula is as follows:
Sales = Break-even Sales + Desired Profit Percentage +% Variable Cost
Example: The company XYZ wants to obtain a 20% profit on the breakeven point. Determine the sales volume necessary to obtain said profit. (Using the data from the previous examples).
Sales = Break-even Sales + Desired Profit Percentage +% Variable Cost
Sales = 4,346,938 + 20% (4,346,938) + 51% (4,346,938)
Sales = 4,346,938 + 869,387 + 2,216,938
Sales = 7,433,263
Application
| Sales | 7,433,263 |
| (-) Variable costs | 3,790,964 |
| = Gross Profit on Sales | 3,642,299 |
| (-) Fixed costs | 2,130,000 |
| = Net income | 1,512,299 |
Then Professor Rolando Cotaquispe Mendoza explains in a simple and clear way the concept of the equilibrium point, how to calculate it in quantities and in money, how to graph it, how to know from what amount of production profits are generated and how to determine the fixed costs and variables.
