The meaning of the break-even point: this is such a revenue and such a volume of sales of the firm that provide coverage of all costs, zero profit and loss.

The calculation of the break-even point allows you to solve the following problems:

1. Determine what sales volume will need to be achieved in order to recoup the investment.

2. Because revenue depends on price and quantity, it is necessary to calculate the necessary change in each of them if the other component changes. In other words, if a firm needs to lower the price of one of its products, how should the volume of sales be changed in order to maintain the same level of profit.

3. If the company receives more revenue than that which corresponds to the break-even point, it operates at a profit. This profit is the greater, the greater the difference between the actual revenue and the revenue corresponding to the break-even point. By comparing these two revenue figures, we can estimate how much a firm can tolerate a decline in revenue without fear of losing.

The revenue corresponding to the break-even point is the threshold revenue.

Threshold revenue = fixed costs / coverage ratio

To determine the amount of threshold revenue, it is necessary

Calculate the amount of coverage, i.e. how much money the company earns to recoup fixed costs and make a profit. Coverage = revenue - variable costs = fixed costs + profit.

However, for such a calculation of the break-even point, it is necessary to introduce omissions:

Expanding the volume of sales, the company does not change the selling price. For a long time and a large volume, this is illegal. For short time and small volume, this is acceptable.

With the expansion of production volume, the rate of change in costs is different. We assume that costs rise evenly.

In order to assess how much the actual revenue exceeds the revenue that ensures break-even, the concept of safety margin should be introduced.

Safety margin = ((actual revenue - threshold revenue) / actual revenue) * 100%.

29. Cost structure and risk. The effect of operational (production) leverage.

Cost structure - the ratio of the shares of various cost items in their total amount

Entrepreneurial risk - the danger of shortfall in income, the occurrence of material and financial losses in entrepreneurial activity. There are acceptable risk, in which the level of losses does not exceed the expected profit of the entrepreneur, critical risk with a tangible probability of losses exceeding the calculated profit, catastrophic risk, characterized by losses that the entrepreneur is unable to compensate for, leading to bankruptcy, the collapse of the business.

The production (operating) lever shows what effect a change in a firm's revenue has on a change in its profits.

Operating leverage reflects the degree to which a change in a firm's revenue has an effect on a change in its profits.

Operating leverage = increase in profit / increase in revenue (indicators are taken as a percentage).

The higher the effect of production leverage, the more risky is the position of the firm (change in profits). The firm should strive to reduce the effect of leverage.

The economic meaning of the lever: if the production lever = 3, then an increase (decrease) in revenue by 1% will lead to an increase (decrease) in profit by 3%.

Operating leverage = coverage/profit

Using the leverage formula, you can also calculate how much a firm's fixed or variable costs need to be cut to compensate for a given change in sales revenue. If we want the profit to remain the same with a decrease in revenue, then we can reduce variable costs:

Variable costs = revenue after change - profit * leverage.

In any business, it is important to calculate at what point the company will fully cover losses and begin to generate real income. For this, the so-called break-even point is determined.

The break-even point shows the effectiveness of any commercial project, since the investor must know when the project will finally pay off, what is the level of risk for his investment. He must decide whether to invest in the project or not, and the calculation of the break-even point in this case plays an important role.

What is the break-even point and what does it show

Break even ( break-evenpoint- BEP) is the sales volume at which the entrepreneur's profit is zero. Profit is the difference between income (TR-totalrevenue) and expenses (TC-totalcost). The break-even point is measured in physical or monetary terms.

This indicator helps to determine how many products need to be sold (work performed, services provided) in order to work to zero. Thus, at the break-even point, income covers expenses. When the break-even point is exceeded, the company makes a profit; if the break-even point is not reached, the company incurs losses.

The BEP value of an enterprise is important in determining the financial stability of a company. For example, if the BEP value is rising, this may indicate problems related to making a profit. In addition, BEP changes with the growth of the enterprise itself, which is caused by an increase in turnover, the establishment of a sales network, price changes and other factors.

In general, the calculation of the break-even point of the enterprise makes it possible to:

• determine whether to invest money in the project, given that it will pay off only with the next sales volume;
• identify problems in the enterprise associated with changes in BEP over time;
• calculate the value of changes in the volume of sales and the price of the product, that is, how much the volume of sales / production should change if the price of the product changes and vice versa;
• determine by what value the revenue can be reduced so as not to be at a loss (in case the actual revenue is greater than the calculated one).

How to Calculate the Break Even Point

Before you find the break-even point, you must first understand which of the costs are fixed and which are variables, since they are mandatory components for the calculation, and it is important to separate them correctly.

The permanent ones include: depreciation deductions, basic and additional wages of administrative and managerial personnel (with deductions), rent, etc.

The variables include: basic and additional materials, components, semi-finished products, fuel and energy for technological needs, basic and additional wages of the main workers (with deductions), etc.

Fixed costs do not depend on the volume of production and sales and practically do not change over time. Changes in fixed costs can be affected by the following factors: growth/decline in the capacity (productivity) of an enterprise, opening/closing of a production workshop, increase/decrease in rent, inflation (depreciation of money), etc.

Variable costs depend on the volume of production and change with volume. Accordingly, the greater the volume of production and sales, the greater the amount of variable costs. Important! Variable unit costs do not change with the volume of production! Variable costs per unit of output are conditionally fixed.

Calculation formula

There are two formulas for calculating the break-even point - in physical and value terms.

• Fixed cost per volume (FC– fixedcost);
• Unit price of goods (services, works) (P– price);
• Variable costs per unit of output (AVC - averagevariablecost).

BEP=FC/(P-AVC)

In this case, according to the results of the calculation, a critical volume of sales in physical terms will be obtained.

• Fixed costs (FC - fixed cost);
• Revenue (income) (TR - totalrevnue) or price (P - price);
• Variable costs per volume (VC - variable cost) or variable costs per unit of output (AVC - average variable cost).

First you need to calculate the marginal income ratio (the share of marginal income in revenue), because. this indicator is used in calculating the break-even point in terms of money, and marginal income. Marginal income (MR– marginalrevenue) is found as the difference between revenue and variable costs.

Since unit revenue is a price (P=TR/Q, where Q is sales volume), you can calculate marginal revenue as the difference between price and variable cost per unit.

The marginal income ratio is calculated using the following formula:

or (if MR is calculated from price):

Both of the above formulas for calculating the contribution margin ratio will lead to the same result.

The break-even point in monetary terms (this indicator is also called the "profitability threshold") is calculated using the following formula:

BEP=FC/KMR

In this case, according to the results of the calculation, a critical amount of revenue will be obtained, at which the profit will be equal to zero.

For more clarity, it is necessary to consider specific examples of calculating the break-even point for various types of organizations.

An example of calculating the break-even point for a store

In the first example, let's calculate the break-even point for a trade enterprise - a clothing store. The specifics of the enterprise is such that it is inappropriate to calculate the break-even point in physical terms, since the range of goods is wide, prices are different for different product groups.

It is advisable to calculate the break-even point in monetary terms. The fixed costs associated with the operation of the store include:

• for rent;
• salaries of sales consultants;
• salary deductions (insurance contributions - 30% of the total salary);
• for utilities;
• for advertising.

The table shows the amounts of fixed and variable costs.

In this case, we will take the amount of fixed costs equal to 300,000 rubles. The revenue is 2,400,000 rubles. The amount of variable costs, which include the purchase prices of things, will be 600,000 rubles. Marginal income is equal to: MR=2400000-600000=1800000 rubles

Marginal income ratio is: K MR =1800000/2400000=0.75

The break-even point will be: BEP=300,000/0.75=400,000 rubles

Thus, the store needs to sell clothes for 400,000 rubles in order to make a zero profit. All sales over 400,000 rubles will be profitable. The store also has a financial safety margin of 1,800,000 rubles. The margin of financial strength shows how much the store can reduce revenue and not go into the loss zone.

An example of calculating the break-even point for an enterprise

In the second example, we will calculate the break-even point for the enterprise. Small and medium-sized industrial enterprises often produce homogeneous products at approximately the same prices (this approach reduces costs).

Permanent	rubles	Variables per unit	Unit price, rub	Volume of production, pcs.	rubles
general factory expenses	80 000	material costs (for the entire volume of production)	150	1000	150 000
depreciation deductions	100 000	costs for semi-finished products (for the entire volume of production)	90	1000	90 000
AUP salary	100 000	basic workers wages	60	1000	60 000
utility costs	20 000	salary deductions (insurance contributions - 30% of the total salary)	20	1000	20 000
Total	300 000		320		320 000

The breakeven point will be equal to:

BEP=300000/(400-320)=3750 pcs.

Thus, the company needs to produce 3750 pieces to break even. Exceeding this volume of production and sales will result in a profit.

Many argue that before that, it is useful to conduct a survey of representatives of the target group.

• the company leaves the same price with an increase in sales, although in real life, especially for a long time, this assumption is not entirely acceptable;
• costs also remain the same. In fact, as sales increase, they usually change, especially at full capacity, where the so-called law of increasing costs begins to work and costs begin to grow exponentially;
• TB implies the full sale of goods, that is, there are no remnants of unsold goods;
• the value of TB is calculated for one type of product, therefore, when calculating the indicator with several different types of goods, the structure of types of goods should remain constant.

breakeven point chart

For clarity, we will show how to calculate the break-even point (example on the chart). You need to draw a line of revenue, then a line of variable costs (inclined line) and fixed costs (straight line). The horizontal axis is the volume of sales/production, and the vertical axis is the cost and income in monetary terms.

Then add the variable and fixed costs to get the gross cost line. The break-even point on the chart is at the intersection of the revenue line with the gross cost line. On our graph, this point equals 40% of sales.

The revenue in TB is the threshold or critical revenue, and the sales volume is, respectively, the threshold or critical sales volume.

You can independently calculate the break-even point (formulas and graph) in Excel by downloading the file (16 kB).

conclusions

In general, the break-even point is an extremely important indicator when planning production and sales volumes. This indicator also allows you to understand the ratio of costs and income and make decisions about changes in prices for goods (works, services).

This indicator is necessary in any business and when evaluating an investment project for making decisions at a strategic level.

Video about the fact that in order to attract an investor, you will need to show the BEP calculation:

T.A. Frolova
Economics and Management in the Sphere of Socio-Cultural Service and Tourism: Lecture Notes
Taganrog: TTI SFU, 2010.

Topic 3. TOUR DEVELOPMENT AND PRICING IN TOURISM

4. Break-even and profitability of the travel agency

The financial stability of a travel agency depends entirely on the amount of revenue. Revenue is determined by the product of the price of a good (service) by its sold quantity. The amount of revenue must cover all costs incurred and ensure profit.

To solve this problem, economic science has developed the following indicators:

The amount of coverage;

Average coverage;

Coverage ratio;

Break-even point (profitability threshold);

Threshold revenue;

Margin of safety.

Amount of coverage is the difference between revenue and total variable costs. Thus, the coverage amounts are the sum of fixed production costs and profits.

Average coverage is the difference between the unit price and the average variable cost. The average coverage value reflects the contribution of a unit of product to covering fixed costs and making a profit.

coverage ratio called the share of the amount of coverage in the proceeds from the sale. For a unit of goods, the coverage ratio is the share of the average coverage in the price of a unit of goods.

Under breakeven point is understood as such revenue and such volume of production of the travel agency, which provide coverage of all its costs and zero profit.

Threshold revenue(sometimes called critical sales volume) is the revenue that corresponds to the break-even point.

Margin of safety is the percentage deviation of actual revenue from the threshold. It is determined by the ratio of the difference between the actual and threshold revenue to the actual revenue in percentage terms.

The revenue corresponding to the break-even point is called the threshold revenue. The volume of production is the threshold volume of production. The most important indicator is the threshold revenue, since the volume of production can be different depending on the price of the products sold.

To assess how much the actual sales revenue exceeds the break-even revenue, we calculate the margin of safety - this is the percentage deviation of the actual revenue from the threshold:

St = ───── x 100%

where St is the margin of safety; R - actual revenue; R! - threshold revenue.

The greater the margin of safety, the more stable the position of the enterprise.

The value of the margin of safety of 29% shows that if, due to a change in the market situation (reduction in demand, decrease in competitiveness), the company's revenue is reduced by less than 29%, then the company will

get a profit; if more than 29% - will be at a loss.

Manufacturing lever. Concept. Characteristic. Calculation procedure. Significance for the economic activity of the enterprise.

The production (operating) leverage shows what effect a change in the company's revenue has on its profit. The higher the value of the effect of the production lever OL, the more risky in terms of profit volatility is the position

enterprises:

OL = ────

where ∆ Pr is the percentage change in profit; ∆R is the percentage change in revenue.

For example, if the effect of the production lever is 2, then a change in revenue by 1% will lead to a change in profit by 2%, i.e. the company will be without profit if revenue is halved.

The effect of production leverage can also be calculated using the formulas:

R-VC-FC-Pr-FC

OL = ───── = ───────= 1 + ───

where R - revenue, FC - fixed costs, VC - variable costs, Pr - profit.

Using the production leverage formula, you can calculate how much you need to reduce the fixed and variable costs of the enterprise in order to compensate for this change in sales revenue.

Topic 9. Theory of production and marginal productivity of factors

Production. Concept. essence of production.

Production - is the activity of a person through which he satisfies his needs. After all, nature does not provide man with the benefits he needs. They must be produced. That is why production is an objective necessity.

Human needs are limitless and constantly growing. In economic theory, this trend is represented by the "law of rising needs." Growth in demand constantly spurs production.

So, the purpose of production is to meet the needs of man and society. This is achieved through the interaction of man and nature. And since the active side ("subject") in such interaction is a person, we can make one more important clarification: production is a process of transforming nature by a person - animals adapt to nature, while a person subordinates it to himself.

The totality of all the forces used by a person in the production process (including the physical and spiritual efforts of the person himself) in economic theory is denoted by the concept "productive forces".

The main elements of the structure of production, depending on the purpose and type of products. Types of production development. Reproduction and its types.

There are three types of production: single, serial, mass.

Single production characterized by a small volume of production of identical products, re-manufacturing and repair of which, as a rule, is not provided. The pinning ratio for a single production is usually higher than 40.

Mass production characterized by the manufacture or repair of products in periodic batches. Depending on the number of products in a batch or series and the value of the coefficient of consolidation of operations, small-scale, medium-scale and large-scale production is distinguished.

Mass production It is characterized by a large volume of output of products that are continuously manufactured or repaired for a long time, during which one work operation is performed at most workplaces. The coefficient of fixing operations for mass production is assumed to be 1.

There are two main types of production development - extensive and intensive.

Extensive type is carried out through the use of additional resources, without changing the average productivity of labor. It assumes an increase in the use of production factors on the same technical basis (an increase in the number of employees, an increase in investments, consumed raw materials, etc.).

Intensive type associated with the use of more productive factors of production and technology, that is, development occurs not by increasing the volume of resource costs, but by increasing their efficiency. It means the qualitative improvement of the factors of production, their more efficient use, the introduction of the achievements of science, technology, technology, the improvement of the quality of labor, products and production.

In economic theory, the division of the economy into sectors is very common: primary, secondary and tertiary.

The primary sector includes agriculture, forestry, hunting and fishing;

Secondary sector - industry and construction;

The tertiary sector includes the production of services (health, communications, education, etc.)

The primary and secondary sectors are often combined into the sphere of material production.

There are also real and financial (monetary) sectors. Goods and services are created in the real sector, while the financial sector is designed to serve the real sector, in which products are actually produced, with money and financial services.

Reproduction is a process of social production, which is constantly and continuously repeated and renewed. It covers all aspects and elements of the production method. The reproduction of productive forces and production relations is called social reproduction.

There are two types of reproduction:

Simple is the resumption of production on an unchanged scale in relation to the quantity and quality of manufactured products. The factors of production do not change in each successive cycle. All additional product goes to consumption.

Extended - reproduction, in which the size of the product in each subsequent cycle increases, and the quality of the product increases. For this, additional factors of production are used. The source of their increase or qualitative improvement is an additional product.

Types of extended reproduction.

Extensive - an increase in production occurs due to a quantitative increase in production factors while maintaining their parameters. The productivity of labor and the efficiency of the means of production remain unchanged.

Intensive - the scale of production increases due to the qualitative improvement of production factors with the improvement of organizational and economic relations (division of labor, specialization, cooperation).

1. production function.

production function determines the maximum output for each given amount of resources. This function describes the relationship between the cost of resources and the output of goods, allowing you to determine the maximum possible output of goods for each given amount of resources, or the minimum possible amount of resources to ensure a given volume of output of goods.

Q = f (F1, F2 …Fn)

Where Q is the maximum volume of a product that can be produced with a given technology and certain production factors; F1, F2, Fn - costs of production factors

Any improvement in the technology of production, which contributes to the growth of labor productivity, leads to a new production function.

The production function shows the maximum quantity of a good that can be produced with different combinations of factors L and K and the alternative possibilities under which different combinations of factors provide the same amount of output.

For example, a product output of 37 units can be obtained by combining 3 units. labor and 4 units. capital or 5 units. labor and 3 units. capital, i.e. 37 \u003d f (3L, 4K); or 37=f(5L+3K).

The break-even point is understood as such revenue and such volume of production, which provide the company with the coverage of all its costs and zero profit. The calculation of the break-even point allows the company to solve the following tasks:

1. Since the future volume of sales and the price of a product largely depend on the market, its capacity, the purchasing power of consumers, the elasticity of demand, the manufacturer must be sure that his costs will pay off and bring profit in the future. If the volume of demand that allows to recoup costs and make a profit cannot be achieved due to, for example, the narrowness of the sales market, then it is always better to know about this before starting production and investing.

2. Since revenue depends on two components: the price of the product and the volume of sales, it is possible to calculate the necessary change in each of them if the other component changes. For example, an enterprise is forced to reduce the price of products in order to maintain its competitive position. You will have to increase sales to maintain the amount of profit previously received.

3. If the company receives more revenue than that which corresponds to the break-even point, it operates at a profit. This profit is the greater, the greater the difference between the actual revenue and the revenue corresponding to the break-even point. By comparing these two revenue figures, one can estimate how much a firm can tolerate a decrease in revenue without fear of being at a loss.

The procedure for calculating the break-even point given below is very simple and allows you to quickly and without complex calculations find the desired value. However, it is necessary to dwell on some assumptions that are accepted in this case.

First, we assume that by expanding the volume of sales, the firm does not change the selling price. With regard to a long time and a large volume of production, such an assumption is not valid. However, for a short period of time and small volumes, it is quite acceptable, so the gross revenue graph in Fig. 13.1 looks like a straight line.

FC - fixed costs; VC - variable costs; TC - gross costs; TR - gross proceeds (gross income); R" - threshold revenue; Q" - threshold sales volume

Second, the same assumption applies to costs. It is known that with the expansion of production volume, the rate of change in costs is different. At a certain stage, the law of diminishing returns begins to operate, and the rate of growth of costs accelerates. This translates into an increase in marginal cost if production capacity is overused. However, here we assume that costs grow evenly, which is also quite acceptable if the enterprise operates with a normal load and there are no strong fluctuations in output.

Shown in fig. 13.1 the break-even point is the intersection point of the graphs of gross revenue and gross costs. The amount of profit or loss is shaded. If the company sells products less than the volume Q ", then it suffers losses, if it is more than this volume, it makes a profit. The point corresponding to the volume of production Q" and the revenue R "received by the firm is the break-even point. At this point, the revenue received by the firm is equal to its gross cost, with profit equal to zero The revenue corresponding to the break-even point is called the threshold revenue The volume of production (sales) at the break-even point is called the threshold production (sales) The most important indicator is the threshold revenue, since the threshold sales volume can be different depending on the price of the products sold.

How to find the breakeven point? Let's consider this question with an example.

Example 13.5. The firm produces and sells one product. Below are the data characterizing its activities, rub.:

Sales proceeds ............... 15,000

Variable costs...................... 10000

Fixed costs, .............. 4000

Profit....................... 1000

To find the break-even point, it is necessary to answer the question: to what level should the company's revenue fall in order for profit to become zero? You can't just add up variable and fixed costs, because as revenue decreases, variable costs will also fall. Since we assumed that with a decrease in gross revenue, variable costs would be reduced in the same proportion, we can use the break-even point formula:

where R" - threshold revenue; FC - fixed costs; K - coverage ratio.

Then the sequence of calculations for finding the threshold revenue (revenue corresponding to the break-even point) will be as follows:

1. Find the coverage amount:

15 000 rub.-10 000 rub. == 5000 rub.

2. Let's calculate the coverage ratio (the share of the coverage amount in the sales proceeds): 5,000 rubles: 15,000 rubles. = 0.33.

3. Determine the threshold revenue: 4000 rubles: 0.33 \u003d 12,121 rubles.

As you can see, the actual revenue of the firm is above the threshold. To assess how much actual sales revenue exceeds break-even revenue, calculate the margin of safety - the percentage deviation of the actual revenue from the threshold:

St=R-R " . 100%

where St - margin of safety; R - actual revenue; R" - threshold revenue.

The greater the margin of safety, the better for the firm. In this example:

St = 15000 rub. - 12121 rubles. .100 = 19%

A margin of safety of 19% shows that if, due to a change in the market situation (reduction in demand, deterioration in competitiveness), the company's revenue decreases by less than 19%, then the company will make a profit; if more than 19% - will be at a loss.

Example 13.6. The company produces two goods: A and B. Below are data on the company's revenue, its costs and profits, rubles:

Commodity Commodity Total

Gross revenue……………………………………………9100 7400 16500

Variable costs……………………………………..7000 6800 13800

Fixed costs……………………………………… 2300

Profit…………………………………………………….. 400

It is required to assess the position of the company by calculating the threshold revenue, margin of safety.

To determine the threshold revenue, we perform the following calculations:

1. Find the amount of coverage: 16,500 rubles. -13 800 rub. = 2700 rubles.

2. Calculate the coverage ratio: 2,700 rubles: 16,500 rubles. = 0.16.

3. Let's determine the threshold revenue by dividing the fixed costs by the coverage ratio: ; 2300 rubles: 0.16 \u003d 14,375 rubles.

4. The margin of safety is equal to:

16500 rub. - 14375 rubles. . 100 = 12.88%

As you know, the company produces two goods: A and B. To determine what contribution each of these goods makes to the profit of the company, it is necessary to allocate fixed costs between these two goods. In practice, various principles for the allocation of fixed costs are used. In this example, fixed costs will be distributed in proportion to the proceeds from the sale of each of the two goods.

Revenue from the sale of product A is 54% of the total revenue of the company, product B - respectively 46%.

The distribution of fixed costs and profits between goods A and B is characterized by the following data, rubles:

Product A Product B Total

Gross revenue……………………………9100 7400 16500

Variable costs……………………..7000 6800 13800

Fixed costs……………………..1242 1058 2300

Profit…………………………………….+858 -458 +400

As you can see, the profit from the sale of product A partially goes to cover losses from the sale of product B. The question arises of how necessary product B is for the company and whether its profit will increase if product B is discontinued.

Let's assume that we decide to refuse to release product B as unprofitable. Then all the fixed costs of the company will fall on a single product A. In this case, the value of the break-even point will change as follows, rubles:

Revenue from the sale of goods A ........................ ……… ..9100

Variable costs for the production of good A ......... 7000

Firm's fixed costs. .......................…………… 2300

Amount of coverage ....................................... …………………..2100

Coverage ratio.................................………………….0.23

Threshold revenue (break-even point) ............... 10,000

It follows from the above data that if the production of unprofitable goods B is abandoned, the production of goods A also turns out to be unprofitable (the actual proceeds from the sale of goods A is less than the threshold). Conclusion: product B is necessary for the company, its production should be maintained.