Breakeven point is such a volume of production of goods/services and liquidity in case of which the costs (variable and fixed) will be compensed by revenues, that is, a zero level of profitability will be ensured. Breakeven point shows the level of realization (revenue) above which the financial result will be positive if a higher index is provided, otherwise - negative.
The breakeven point may be calculated with the below-mentioned formula:
where, Q is the realization (sales volume) in breakeven point
VC- variable costs per unit of product
P- sales cost per unit of product
Fixed costs include the cost not depending on the volume of produced/ saled products. This costs are also called “overhead expenses”. Fixed costs are even paid by non-working enerprises. Fixed costs include rental fees, depreciation allowances, utility payments, salaries of administrative staff, etc.
The costs the level (amount) of which depends on the volume of output. They are contrasted with fixed costs, wihich together make up Total costs. The main indicator by which it is possible to determine whether costs are variable is their disappearance when production or operations ceases. Variable costs include commodity, transportation expenses, salary of production workers and so on.
For what purpose is the breakdown point used
The calculation of breakdown point enables to:
- determine the optimal price of sles of products, works or services;
- calculate the term of project redemption. That is, to calculate the moment when the revenues will exceed expenses;
- follow the indicators of breakeven point to determine the the problems existing in production issuance, realization, implemtation of works or in the process of rendering services;
- find out what effect will a change in products sold, work performed, prices of services rendered, or costs incurred have on the resulting revenue.