Breakeven analysis
Balance point: It is understood that a company of Goods or Services reaches its point of balance when its total costs are equal to its income on a given product.
problems-about-the-equilibrium-point-of-a-product-or-several-productsIt is said that a Company is at its Balance Point when it does not generate Profits or Losses. That is, when the Profit is equal to zero.
Break-even analysis studies the relationship between fixed costs, variable costs, sales volume, and operating profits.
Cost is the economic effort that must be made to achieve a goal.
The variables involved in this analysis are:
FIXED COSTS: (F) Those that are incurred regardless of the production volume, that is, they do not change with production variations. Axes
- Rents Amortizations or depreciations Insurance Fixed taxes (property) Public Services (Electricity, TEL…, Gas, etc.) Salary and social security contributions of managers, supervisors, managers, etc. Administration expenses
VARIABLE COSTS (CV)
Are those costs that vary proportionally, according to the level of production or activity of the company. Higher production will mean higher total variable costs. For example:
- Direct labor Direct raw materials Direct materials and supplies Specific taxes Containers, packaging and labels
TOTAL VARIABLE COSTS (CVT)
CVTs are equal to the number of units produced and sold times variable unit cost.
Let us denote by a = unit variable costs (cost per unit produced) and Q = the units produced and sold
Then the CVT = Qa
TOTAL COSTS (CT)
Total costs are equal to total fixed costs plus total variable costs =
CVT = Qa + F
MARGINAL COST (CM)
It is the cost of producing an extra unit of a good or service. The marginal cost can be the unit variable cost, but if these are not constant and there is economy of scale, the marginal cost will depend on the level of production at which one works.
INCOME
When a company sells its production or services to a customer, the value of the purchase, paid by the customer, is the income received by the company. This income can be used by companies to pay workers' salaries, pay for the goods they used for production (inputs), pay the credits they have obtained, give profits to the owners of the company, save, etc.
Revenues are equal to the number of units produced and sold (Q) times the unit sale price (b)
I = Qb
BALANCING POINT CALCULATION
The breakeven point is found when your total costs equal your income.
Qe = equilibrium point in units
CT = I
F + Qa = Qb
Qe (b - a) = F
Qe = F ⁄ (ba) = equilibrium point in units b - a = unit marginal contribution
Q (ba) = marginal contribution total
Marginal contribution, Q (ba), it is called because it contributes to cover fixed costs and generate profits
Graphs about the equilibrium point
Graphical representation of the fixed cost of a company of $$ 1,050,000
It is observed that although production costs increase fixed
costs remain the same fixed costsF ($)
$ 1,200,000
$ 1,000,000 $ 800,000
Production and sales - fixed costsF ($)
Income line increases as sales increase
The graph shows the total costs
TOTAL COSTS
PRODUCTION (Q) CT ($) $ 1,050,000
Graphical representation of the breakeven point, when income intercepts fixed costs
To conclude and as a complement to this document, the following video is suggested in which it is explained through a didactic example how to calculate the equilibrium point.
For an explanation of how to obtain it for a single product you can consult how the balance point is determined
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