Break-even point

The break-even point is the minimum Turnover from which a produced (or an activity of a company), at cost given, becomes profitable, i.e. it ceases losing money. There exists of course as many break-even points of selling price possible. The art of the fixing of the prices consists in determining best, or the least bad, for the profitability of the company. As long as a product does not reach its break-even point, it loses money; when the situation lasts too a long time, the product is generally withdrawn from the market. The calculation of the break-even point is thus an important component in the decision to market or continue the diffusion of a product.

This indicator can be calculated very simply in the companies which resell in the state the products that they bought. In the companies with complex production (multiple products, several chains of transformation, etc), calculation supposes the installation of an analytical information system .

Literally, the word derives from the profitable adjective , itself meaning: " who brings back a rente" (an income), generalized within the meaning of " who brings back a bénéfice".

The not dead (or station-wagon-even not English ) is the point of intersection between the curve of the turnover and the curve of the loads necessary to produce this turnover. The break-even point is thus reached when one arrives at the dead point. In practice, the " terms; threshold of rentabilité" and " not mort" are used indifferently.

Normally expressed in financial value (currency), the break-even point can be also expressed in many days of turnover or in produced quantities .

Methods of calculating

There exist several methods of calculating, which will be used according to the awaited degree of accuracy or the interlocutor: a person in charge of workshop will calculate his differently dead point from sales manager. The most widespread methods are the following ones.

Simple accounting method: turnover less total loads

This method is simplest to express: the break-even point of an activity is reached when the turnover is equal to the amount of the loads mobilized by this activity. The loads include/understand the variable fixed charges and loads. The fixed charges correspond to the loads independent of the level of activity (example: expenses of structure, depreciation, etc); while the variable loads vary proportionally on the level of activity (example: labor, raw material, etc). Mathematically, that is expressed as follows:
CA - (CV + CF) >=0
where CA = the turnover, CV and CF represent the variable loads and the fixed charges.

Method based on the margin: stroke on less fixed overhead variable cost standing

The break-even point is obtained when the margin between the turnover relating to the product and the variable costs which fall on to him becomes higher than the sum of the standing Fixed overhead immobilized to produce it.

CF/Taux MCV >=0

or:

CA*CF/MCV >=0

N.B. : MCV = CA - CV The margin on variable cost (MSCV) is equal to the difference between the turnover and the total of the variable loads (approach of total calculation). In the case of calculation of the unit margin (by type of product), it is equal to the difference between the unit selling price and the unit variable cost associated with each product.

This manner of measuring the break-even point is mathematically identical to the first method, but highlights the margin carried out instead of the weight of the turnover.

Financial method: to include the cost of the capital

Beyond these countable calculations, the not death financier is that where the margin covers not only the fixed costs, but also the Coût of the committed capital, decisive financial concept to consider the stockholders' equity necessary to the activity and to make regard the company as healthy by the banks.

Importance of calculation for a company

For a company, the determination of the break-even point is necessary.

  1. It is a factor of decision for the launching of a new product on the market, or its withdrawal;

  2. It makes it possible to calculate the amount of the turnover from which the activity is profitable, or dates it to which the company will start to make benefit;
  3. It makes it possible to know where the margin really released by the company is at a given moment;
  4. It makes it possible to study the rate of risk to be in deficit, and correlatively to appreciate safety available to the company if the economic situation becomes unfavourable;
  5. It makes it possible to better study and analyze the role and the burden-sharing between fixed and variable; in particular it obliges to calculate the margin on variable cost (MSCV), whose interest is to avoid the disadvantages of the charge of the fixed charges at the various cost of the products of the company.

Limits:

  1. It is an estimated system . Does the decision thus depend on the quality of the data entered calculation of the margin, itself function of the choice of the data (which expenditure is taken into account? according to which criterion?) and of their exactitude (the control of their reality is not possible that a posteriori).
  2. It is a normative system : certain costs are excluded, others integrated according to often calculated scales in a standard way. It thus represents only one simplification of reality.
  3. And yet, it is a system little normalized : the methods are different from one company to another, or a exercise with the other. There does not exist " catalog" costs to be taken into account. The comparison is thus difficult.

Calculation while going up or in quantities

For example:
  • Is a break-even point (SR) reached when the turnover arrives at: 2500 euros. If each product is sold 25 euros, the SR is reached at the end of 100 sold units.
  • If the annual turnover of the product =: 10000 euros, the SR is reached in (: 2500/: 10000 × 360) 90 days, is in 3 months of sales (under the assumption that the product is sold regularly throughout the year).

When the calculation of the break-even point is carried out starting from the elements of the differential income statement (the margin on variable cost and costs fixed), one can express the margin on variable cost in % of the turnover:

Taux of MCV = MCV X 100/CA

The break-even point is reached if:

Marge on variable cost >= costs fixes

Or if:

(CA X Rate of MCV) - CF >= 0

One from of deduced the relation:

  1. Break-even point in value is reached when: MCV/fixed Coûts >= 1

  2. Break-even point in quantity is reached when: (MCV unit X qté)/fixed Costs >= 1

Calculation of the dead point

The break-even point is mainly calculated in currency . But it can be converted into produced quantities or many days of turnover. In the same way, one can determine the date from which the company reaches its dead point.

The dead point represents the date on which the break-even point is reached.

1- In the event of a regular activity:

In the case of a regular activity, i.e. a Turnover carried out at the end of the exercise which distributed in equal shares a monthly or quarterly base, etc, one can calculate the date on which the company gave off CA equal to the point died using the following formula:

Point dead = Break-even point X 12 months/Figure of affaires
(For a monthly basic determination)

or:

Date of attack of the Break-even point = 360 × (SR/CA)
(For a more precise determination according to one day exact during the year)

This by supposing that the turnover (denominator) is higher in value than that of the break-even point (the company is not in loss).

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