In business, determining the break-even point is very important because it shows when you start a profitable business. So what is the break-even point? Calculation formula Break-even revenue how?
Find out through the content of the article below.
Table of Contents
What is breakeven revenue?
Break-even revenue (Break even revenue) is the revenue at the breakeven level of output.
So what is the breakeven yield? Breakeven yield (Break even volume) is the production output of a business at which revenue is just enough to cover costs, including fixed and variable costs.
Criteria for determining break-even point
The break-even point is the point at which the total revenue just enough to cover the total costs, the business has no profit, no loss, and the profit is at 0.
The criteria for determining the break-even point include:
- Break-even product output
- Sales revenue at breakeven point
- Time to break even
Formula to calculate breakeven revenue
Break-even revenue is calculated based on 2 specific cases as follows.
TH1: The enterprise produces only one type of product or one type of product
I have the formula
Income = Variable Cost + Fixed Cost + Profit
At the break-even point, the firm’s profit = 0
- Revenue = Variable cost + Fixed cost
- Qhv * p = v * Qhv + F
- Qhv = F/ (p – v) (1)
Interpretation of formula (1) :
Break-even output = Total fixed cost / (Product selling price – Variable cost per unit)
- Break-even revenue = Break-even volume x Unit selling price
Recipe calculate breakeven revenue This model is built on the concept that for every consumable good, a contribution balance (pv) must be distributed to cover it. Therefore, knowing the fixed cost and contribution margin of a good, it will be calculated:
Breakeven yield = Total fixed costs / Contribution margin
Qhv = F / Contribution margin per unit
When the contribution margin ratio is known, then:
Break-even income = Full fixed costs / contribution margin ratio
TH2: Enterprises produce many goods
In case of buying and selling many products and goods, each type will have a different price, so to determine the output and break-even revenue, it is necessary to calculate the relative according to the average criterion.
The steps to calculate breakeven revenue in this case include:
- Step 1: Build % structure of consumable items.
Percentage of each product type i = (Sales of each product type i / Total sales) x 100%
- Step 2: Build average % contribution balance of each product type i
Average fixed cost percentage = fixed cost ratio ix product structure ratio i
- Step 3: Determine the overall breakeven income of the items in the following way:
Breakeven income = Total fixed costs / % of average contribution margin
- Step 4: Define breakeven sales and breakeven output for each product item
Break-even revenue (i) = Break-even revenue (general) x % structure of each product item i
Break-even volume of item i = Break-even revenue (i) / Selling price of item i
What does breakeven point mean?
When it comes to the factors of cost – output – profit, the break-even point is an important content that every business is interested in.
We can consider the breakeven point graph as follows:
In there:
- Y-axis represents revenue (OY)
- X-axis represents activity level (OX)
- The intersection point of the cost curve with the OY axis is the fixed cost
- The break-even point is the intersection of the revenue and cost curves
- Projecting the breakeven point down the X axis gives us the breakeven output
- Projecting breakeven point to Y-axis, we get breakeven revenue
- Values X > Y breakeven profitable business
- If X < Y breakeven, the business has a loss
The analysis of the distributed break-even point for managers helps them have a comprehensive view of the relationship between these three factors in the business operation process. That is what makes it clear:
- At what level of output and revenue is the break-even point achieved?
- The level of profit and loss of the business according to the cost structure, consumption volume, and generated income.
- Income safety margin to reach a desired level of revenue. Evaluating the break-even point will enable managers to analyze the business process proactively and actively, clearly grasp the output level and how much income will break even in the period. purchase. From there, the business owner has a basis to rebuild the profit and loss area of the company and find positive direction measures to increase production and sales with high efficiency.
What are the advantages of break-even analysis?
The assessment of break-even point is widely applied in production, business and trading activities, it has a number of important applications as follows:
- Used to analyze revenue, budget of a project, a company.
- Used in choosing investment plans for production and business
- Enough resources to be used in researching, minimizing and minimizing risks of an enterprise or an investment project.
Specific example of how to calculate Breakeven Revenue
Example 1
With the data of Hung Thinh garment company (unit: 1,000 VND)
| Targets | total | Calculate for one product |
|---|---|---|
| Revenue |
300,000 won (calculated per 1,000 shirts) |
300 |
| Direct material cost | 150,000 won | 150 |
| Direct labor costs | 20,000 won | 20 |
| Variable manufacturing overhead | 5,000 won | 5 |
| Total variable cost | 175,000 won | 175 |
| Profit on variable cost | 125,000 won | 125 |
| Fixed costs | 37,000 won | 37 |
| Profit | 88,000 won | 88 |
From the data of Hung Thinh Garment Company, we will determine the breakeven revenue as follows:
Method 1:
Fixed cost = 37,000 (thousand VND)
Unit variable cost: 175 (thousand VND)
Profit per unit variable cost: lb = 125 (thousand dong)
We have: SLH = 37,000/125 = 296 (products)
Breakeven revenue will be: 296 x 300 = 88,800 (thousand VND)
Method 2:
Dth = 37,000 : 41.67% = 88,800 (thousand dong)
Example 2
Hung Thinh Garment Company produces three types of TH 10, TH 14, TH 20 products During the year the company sold 2,000 TH 10 products, 1,000 TH 14 products and 1,000 TH 20 products with the selling price of 200 respectively. (thousand dong), 300 (thousand dong) and 250 (thousand dong).
The company’s revenue, expense and business results for these three products are as follows:
| Targets | TH 10 | TH 14 | TH 20 | total |
|---|---|---|---|---|
| 1. Revenue (unit: 1,000 VND) | 400,000 won | 300,000 won | 250,000 won | 950,000 won |
| 2. Variable charges | 260,000 won | 175,000 won | 175,000 won | 610,000 won |
| 3. Profit on variable cost | 140,000 won | 125,000 won | 75,000 won | 340,000 won |
| 4. Interest-to-variable cost ratio | 35% | 41.67% | 30% | 35.79% |
| 5. Fixed fee | 150,000 won | |||
| 6. Profit | 190,000 won |
Profit of 190,000 (thousands of dong) as well as revenue of 950,000 (thousands of dong) for all three products. So with how much revenue will the company reach the break-even point, and at that point, what will be the output of each product?
The answer
Step 1: Determine the ratio of the revenue structure of the consumed items
Product TH 10: (400,000 : 950,000) x 100% = 42.1%
Product TH 14: (300,000 : 950,000) x 100% = 31.6%
Product TH 20: (250,000 : 950,000) x 100% = 26.3%
Step 2: Determine the average variable cost ratio of the items
Lb% = 340,000 : 950,000 = 35.79%
Step 3: Determine the overall breakeven revenue
Dth = 150,000: 35.79% = 419,118 (thousand VND)
Step 4: Determine breakeven sales and breakeven output for each item
| Items | Break-even revenue | Price | Breakeven yield |
|---|---|---|---|
| TH 10 | 419,118 x 42.1% = 176,471 | 200 | 883 |
| TH 14 | 419,118 x 31.6% = 132.353 | 300 | 441 |
| TH 20 | 419,118 x 26.3% = 110,294 | 250 | 441 |
Thus, to achieve breakeven, Hung Thinh Garment Company must be able to make sales for TH10, TH14, and TH20 products of 176,471, 132,353 and 110,294 thousand dong, respectively. In kind, there will be 883, 441 and 441 products, respectively.
Conclude
Closing in business activities, determining the break-even point, break-even revenue is an important basis for enterprises to deploy business plans effectively.
Through the content of this article, lamchutaichinh helped you determine the meaning and formula to calculate the most accurate breakeven revenue.
