How to determine the profitability threshold
Video: Ratio Analysis - Profitability 2024, July
The profitability threshold, or the breakeven point, represents revenue in such an amount that provides full coverage of all costs with a profit of zero. At the breakeven point, revenue may change, which entails the occurrence of profit or loss.
Instruction manual
1
There are two ways to determine the profitability threshold: analytical and graphical.
With the analytical method of calculating this indicator, the following formula should be adhered to:
Profitability Threshold = Zpost / Coeff val.Margin, Where Zpost - fixed costs, Koef shaft. Margins - gross margin ratio.
Shaft. Margin = B - Zper, Where B is the revenue, Zper - variable costs.
Coefficient val.margin = Val.margin / V.
2
From all of the above formulas, you can get one complete to find the threshold of profitability:
Profitability Threshold = Zpost * V / (V-Zper).
3
Using the graph, the profitability threshold is found as follows. On the OY axis, note fixed costs. Draw a fixed cost line parallel to the OX axis.
4
On the OX axis is sales. Select any point on the OX axis. For the selected sales volume, calculate the value of fixed and variable costs. Build a line that matches the set value.
5
Again, mark for yourself any point of sales on the OX axis. For this value, find the amount of revenue, also build a straight line for these values.
6
On the graph, the threshold of profitability (break-even point) will be the point at the intersection of the straight lines constructed in accordance with paragraphs 4 and 5 of this instruction. The profitability threshold shows at what value of revenue and total costs the company has no profit and is equal to zero.
note
Note that the higher the sales volume, the lower the fixed costs per unit of output, but the sum of the variable costs remains the same.
Useful advice
If the sales volume is less than the threshold point, the company incurs losses, when the sales volume is greater than the threshold point, the company makes a profit.
You can calculate the profitability threshold for a particular type of product or service.
