How to determine the critical volume of products

In business, much depends on luck, but much is subject to various economic laws. If the former is almost impossible to control, the latter is computable. So, you can calculate the amount of production that is necessary to eliminate costs and expenses.

You will need

Calculator.

Instruction manual

1

Calculate the fixed costs of the enterprise. To do this, add up all the costs that arise in the process of doing business. A feature of this type of cost is that they do not change their value with a change in the volume of products. For example, they can be taxes, depreciation deductions, payment for staff, etc.

2

Determine the price of a unit of output. At a minimum, it should include the funds spent on the source material, on the work on the manufacture of the product, and also on the remuneration of the employee of the enterprise.

3

Calculate the amount of variable costs. Unlike permanent ones, they will directly depend on the number of products produced. In order to find a critical volume of products or a break-even point, you should get an indicator of variable costs per unit of goods.

4

Subtract the resulting value of the variable costs per item from the price of the product. After that, divide the amount of fixed costs by the resulting number. The result is the amount of products that should be produced so that the company is not unprofitable.

5

Calculate the margin of financial strength. In other words, determine how far your real enterprise performance is from the breakeven point. This will allow you to have information about what changes in the volume of products you can allow, and which are already risky.

6

Subtract the previously calculated critical volume from the actual output. Divide the resulting value by the actual output and multiply the total by 100%. The resulting indicator will be the criterion based on which we can make a decision on reducing the output of our products.