Break-even operation of an enterprise depends on many factors, including the choice of the optimal production volume and the appropriate pace of development of the enterprise. To analyze the break-even of production, a necessary condition is to divide the enterprise's costs into constant and variable. To calculate the volume of revenue covering fixed and variable costs, manufacturing enterprises in their practical activities use indicators such as the amount and rate of marginal income.
Marginal income (MI) is the difference between the enterprise’s revenue from the sale of products (works, services) (B) and the amount of variable costs (WITH VARIABLE):
MD = V – WITH VARIABLE (6.13)
On the other hand, the amount of marginal income can be determined by adding fixed costs (C POST) and enterprise profit (P):
MD = S POST + P. (6.14)
The amount of marginal income shows the enterprise’s contribution to covering fixed costs and making a profit.
The average marginal income is the difference between the product price and average variable costs. The average marginal income reflects the contribution of a unit of product to covering fixed costs and generating profit, and can be determined as follows:
MD SR = C - . (6.15)
The rate of marginal income (N MR) is the share of marginal income (MD) in sales revenue (B) or the share of the average value of marginal income (MD SR) in the price of the product (P) (for an individual product).
(6.16)
. (6.17)
To analyze break-even, you must be able to determine the break-even point (self-sufficiency) of the enterprise.
The break-even point is the volume of production and sales at which the income received provides compensation for all costs and expenses, but does not provide the opportunity to make a profit, in other words, this is the lower limit of the volume of output at which profit is zero.
The break-even point is characterized by the following indicators.
1) Critical (threshold) volume of production and sales:
, (6.18)
where C POST - fixed costs for the annual production volume;
P – unit price;
– specific variable costs (variable costs per unit of production).
2) Profitability threshold (PR), which is revenue from the sale of a critical volume of production, at which the enterprise no longer has losses, but still does not make a profit:
PR = Q CRIT × C. (6.19)
3) Financial safety margin (FS), defined as the difference between revenue from product sales (B) and the profitability threshold (PR), showing how much the company can afford to reduce revenue without leaving the profit zone:
ZFP = B – PR. (6.20)
4) Margin of safety (MB), defined as the difference between the volume of sales in physical terms (Q FACT) and the critical volume of sales (Q KRIT):
MB = Q FACT - Q CRIT. (6.21)
The last two indicators assess how far the company is from the break-even point. This influences the priority of management decisions. If the enterprise approaches the break-even point, then the problem of managing fixed costs increases, as their share in the cost increases.
Marginal margin of safety (MSF) is the percentage deviation of actual revenue from the sale of products (works, services) (B) from the profitability threshold:
. (6.22)
Production leverage (literally translated as leverage) is a mechanism for managing the profit of an enterprise, based on optimizing the ratio of fixed and variable costs. With its help, you can predict changes in the profit of an enterprise depending on changes in sales volume, as well as determine the break-even point.
A necessary condition for applying the production leverage mechanism is the use of the margin method. The lower the share of fixed costs in the total costs of the enterprise, the more the amount of profit changes in relation to the rate of change in the enterprise's revenue. Operating leverage is determined using the following formula:
where EPL is the effect of production leverage.
The value of the production leverage effect found using this formula is subsequently used to predict changes in profit depending on changes in the enterprise’s revenue. To do this, use the following formula:
where ∆П – change in profit from sales, %;
∆В – change in sales revenue, %.
With the graphical method, finding the break-even point comes down to constructing a complex graph “costs – volume – profit”. The graph is shown in Figure 6.1.
Figure 6.1 - Break-even chart
Algorithm for constructing a break-even point.
1) The constant cost curve (C POST) is plotted on the graph of the relationship between the volume of output (in physical terms) and the values of revenue and costs. Since fixed costs do not depend on production volume, the fixed cost curve is parallel to the X-axis.
2) A variable cost curve (WITH VARIABLE) is constructed (one point corresponds to the origin of coordinates - with zero production, variable costs are not incurred, the other point corresponds to the value of variable costs at the actual volume of production).
3) A total cost curve (C LOC) is plotted (the sum of fixed and variable costs), parallel to the variable cost curve, higher by the amount of fixed costs.
4) A revenue curve (B) is constructed (one point corresponds to the origin of coordinates - in the absence of sales, revenue is zero, the other point corresponds to revenue from sales of the actual volume).
5) The intersection of the total cost and revenue curves shows the break-even point.
6) When drawing a perpendicular from the break-even point to the x-axis (X-axis), the critical (threshold) volume of production and sales (Q KRIT) is obtained; when drawing a perpendicular to the ordinate axis (Y-axis), a profitability threshold is obtained.
Examples of problem solutions
Problem 1
The company sells the product at a price of 575 rubles. The total fixed costs for its production are 235,000 rubles. Specific variable costs in 2004 amounted to 320 rubles. In 2005, prices for materials decreased, which led to a decrease in unit variable costs by 15%. Determine how the critical volume of production was affected by changes in material prices.
Given:
C = 575 rub.;
WITH POST = 235,000 rub.;
WITH PER1 = 320 rub.;
From PER2 ↓ by 15%.
Solution:
; 
ed.; 
ed.;
ΔQ = 776 – 922 = - 146 ed.
A 15% reduction in variable costs resulted in a reduction in critical production volume by 146 items.
Problem 2
The planned indicators for product A are: price 57 rubles, cost 50 rubles. During the year, the company achieved a reduction in production costs for product A by 8%. The wholesale price remained unchanged. Determine how product profitability has changed.
Given:
C = 57 rub.;
From 1 = 50 rub.;
From 2 ↓ to 8%.
Solution:
; 
; 
;
ΔR = 23.91 – 14 = 9.91%.
A reduction in production costs by 8% led to an increase in product profitability by 9.91%.
Problem 3
Revenue, taking into account indirect taxes, amounts to 2,560 thousand rubles, including VAT - 10%, excise tax 120 thousand rubles, cost of goods sold 1,300 thousand rubles, commercial and administrative expenses 570 thousand rubles. Interest receivable 108 thousand rubles, non-operating income 302 thousand rubles, non-operating expenses 328 thousand rubles. other operating income 286 thousand rubles, other operating expenses 135 thousand rubles. Determine the gross profit, profit from sales, profit before tax and net profit, profitability of production by net profit, profitability of products and sales by profit from sales, if the profit tax is 20%, the average annual cost of OPF is 2250 thousand rubles, and the cost of working capital funds 520 thousand rubles.
Given:
B = 2560 thousand rubles;
Excise tax = 120 thousand rubles;
WITH PROD = 1300 thousand rubles;
KR and UR = 570 thousand rubles;
% FLOOR = 108 thousand rubles;
D OP = 286 thousand rubles;
R OP = 135 thousand rubles;
D INER = 302 thousand rubles;
P VNER = 328 thousand rubles;
OF = 2250 thousand rubles;
OS = 520 thousand rubles.
P VAL, P PROD, P TAX, P CH, R PROD, R SALES, R OPF - ?
Solution:
WITHOUT VAT = 2560: 1.1 = 2327.27 thousand rubles. – revenue excluding VAT;
WITHOUT VAT AND ACC = 2327.27 – 120 = 2207.27 thousand rubles. – revenue excluding VAT and excise taxes;
P VAL = B – S PROD;
P VAL = 2207.27 – 1300 = 907.27 thousand rubles. - gross profit;
P PROD = P SHAFT – KR – UR.
P PROD = 907.27 – 570 = 337.27 thousand rubles. - revenue from sales;
P TAX = P PROD + % FLOOR + D OP – R OP + D INER – R INER;
P TAX = 337.27 + 108 + 286 – 135 + 302 – 328 = 570.27 thousand rubles. – profit before tax;
P CH = P TAX - N PR;
P H = 570.27 × (1 - 0.2) = 456.22 thousand rubles. - net profit;
; 
- product profitability;
; 
- profitability of sales;
; 
- profitability of production.
Break-even point: concept, calculation methodology, application
Break-even operation of a hotel enterprise depends on many factors, including the choice of the optimal volume of production and provision of services and the appropriate pace of development. The amount of revenue must cover all costs incurred and ensure a profit. To solve this problem, there is an appropriate analytical tool.
Coverage amount- the difference between revenue and total variable costs, i.e. the sum of fixed costs and profits. To calculate the coverage amount, all variable costs (sometimes called direct costs), as well as part of the overhead costs, which depend on the volume of production and services provided and are therefore classified as variable costs, are subtracted from revenue.
Under average coverage understand the difference between unit price of a service and average variable cost. The average coverage reflects the contribution of a service unit to covering fixed costs and generating profit.
Coverage factor is called the share of the coverage amount in sales revenue. For an individual service unit, the coverage ratio is the share of average coverage in the price for that service unit.
Break even(critical volume of service provision (sales)) is the volume of sales at which the income received provides reimbursement of all costs and expenses, but does not provide the opportunity to make a profit, in other words, this is the lower limit volume of service provision at which profit is zero.
Hotel break-even points, for example, are characterized by the following indicators:
threshold (critical) sales volume- revenue that corresponds to the break-even point.
profitability threshold- such revenue from sales at which the enterprise no longer has losses, but does not yet receive a profit.
financial safety margin- the amount by which a hotel company can afford to reduce revenue without leaving the profit zone, or the deviation of actual revenue from the threshold.
The margin of financial strength can also be calculated as a percentage if a percentage deviation is established;
margin of safety- the difference between income from break-even sales and income from sales at a certain level of their volume. A high level of margin of safety indicates a relatively safe business position.
Let us give the calculation of the break-even point using the data in table as an example. 7.2 and depict it in Fig. 7.1.
Rice. 7.1.
- 1. Threshold (critical) sales volume = 100,000 rubles:: (386 - 251) rubles/number. = 740 numbers;
- 2. Profitability threshold = 740 rooms x 386 rubles/room. =
RUB 285,700
- 3. Margin of financial strength = 386,000 rubles. - 285,700 rub. = = 100,300 rub.
- 4. Margin of safety = 1000 numbers - 740 numbers = = 260 numbers.
Table 7.2. Initial data for calculation
Thus, with a sales volume of 740 rooms and sales revenue of 285,700 rubles. the hotel reimburses all costs and expenses with the income received, while the enterprise's profit is zero. This state is called the “break-even point” or “dead point.” The margin of financial strength is 100,300 rubles.
The greater the difference between the actual volume of service provision and the critical one, the higher the “financial strength” of the hotel enterprise, and therefore its financial stability.
The value of the critical sales volume and the profitability threshold is influenced by changes in the amount of fixed costs, the value of average variable costs and the price level. Thus, a hotel enterprise with a small share of fixed costs can produce relatively fewer services than an enterprise with a larger share of fixed costs in order to ensure break-even and safety of its production. The margin of financial strength of such a hotel enterprise is higher than that of an enterprise with a larger share of fixed costs.
The financial results of an enterprise with a low level of fixed costs are less dependent on changes in the physical volume of services provided. A hotel company with a high share of fixed costs should be much more concerned about a decrease in room occupancy.
The more competently an enterprise manages its resources, the lower the costs, and the profit, accordingly, will be greater. This can be seen from the following formula:
Дв = V – С,
where Дв - gross income;
V - gross revenue (the full amount of cash receipts excluding VAT and excise taxes); C is the cost of the tourism product (services), (except for labor costs).
Pv = Dv – Zvol.flow,
where Pv - gross profit - part of the gross income minus all mandatory expenses;
Zob.expenses - all mandatory expenses.
Costs (cost) mean the totality of all costs of a tourism industry enterprise necessary for the production and sale of tourism products (services). Consequently, the total costs of a tourism industry enterprise represent production costs and distribution costs and they form the basis for determining cost.
Cost can be determined both per total production volume and per unit (unit cost).
When determining the cost of the total volume of output, all costs are grouped according to the principle of homogeneity according to the following elements:
· material costs;
· labor costs;
· contributions for social needs;
· depreciation of fixed assets;
· other costs.
When determining unit cost (calculation), all costs are grouped not by cost elements, but by costing items, i.e. Expense items are determined depending on their purpose and place of origin. The following types of costs are identified:
· main and invoices;
· direct and indirect;
· constant (conditionally constant) and variable (conditionally variable).
Basic costs are directly related to the created tourism product (service), invoices expenses are associated with the promotion and sale of a tourism product. Unlike basic costs, which are directly attributable to the cost of the tourism product, overhead costs must be distributed. To determine the cost of a specific tourism product (service), all costs are divided into direct and indirect.
Direct costs directly fall on the cost of tourism products (services), and indirect- no, since they relate to the entire volume of tourism products over a certain period of time. Indirect costs must be distributed in proportion to a predetermined characteristic (as a rule, one of the types of direct costs is taken as a characteristic, for example, wages of key employees). Indirect costs are divided into production and non-production.
Indirect production costs (I):
· workers' wages;
· expenses for time-based and subscription fees for telephone conversations;
· expenses for paying interest on loans taken to pay suppliers of certain types of services;
· rent;
· expenses for utilities, repairs and operation of vehicles;
· depreciation and maintenance of production premises;
· expenses for payment of third-party organizations related to the formation and sale of tourism products (services), etc.
Indirect non-production costs (II):
· salaries of management personnel, accounting workers, security personnel, etc.;
· depreciation of fixed assets for management and general economic purposes;
· payment for services of third-party organizations (audit and consulting services, notary services);
· expenses for training and retraining of personnel, certification, etc.
Of particular importance for tourism industry enterprises are costs, the behavior of which depends on changes in production volumes or sales of tourism products (services), i.e. When demand fluctuates, some costs react to these changes, while others remain unchanged. Such costs are called variable and fixed. This division is legitimate in the short term, since almost all costs in the long term depend on changes in the volume of production (sales) of tourism products (services).
Fixed costs(conditionally constant) are costs that do not directly depend on the size and structure of production and sales of products (services). These include wages of enterprise employees (managerial and support personnel) with all mandatory deductions, rental costs, depreciation of fixed assets, utilities, telephone subscription fees, advertising costs, licensing and certification costs, etc. Such costs relate to time and are also called time costs.
Variable costs(conditionally variable) - these are costs that directly depend on the volume of production and sales of tourism products (services). These include costs necessary to create a tourism product (service), in particular, costs for the delivery and accommodation of tourists, food, wages of employees of a tourism industry enterprise (that part of the staff whose remuneration depends on the amount of production and sale of products (services)) with all mandatory deductions, payment of commissions to agents, etc.
Since the functioning of tourism industry enterprises is very dependent on various external factors (seasonality, economic, political, natural), the accounting and management of these costs are of great importance for planning and strategic management of their activities.
On the one hand, fixed and variable costs react differently to changes in the total volume of production (sales) of tourism products (services). On the other hand, the changes (fluctuations) themselves significantly complicate the identification of fixed and variable costs for inclusion in the cost of goods and services, which, in turn, affects the financial results of tourism industry enterprises.
Therefore, in order In order to correctly divide costs into fixed and variable for each area of activity and type of services provided, tourism industry enterprises need to:
1) develop methods for dividing costs into fixed and variable;
2) identify trends in the behavior of certain types of costs from changes in production volumes and sales of goods and services;
3) determine the relativity (conditionality) of the classification of total costs into fixed and variable.
Dividing costs into fixed and variable costs is not always a trivial task. In most cases, costs can be fairly accurately classified as either fixed or variable. But in a number of cases, when the economic situation changes, costs can move from one state to another: say, they were constant, but became variable, and vice versa. The following situation can be cited as an example. An employee works at the enterprise under a contract. At this stage, his salary is considered a variable cost. If he is laid off, the company has to pay him an allowance (average wage) for some time, which becomes a constant cost for the company that does not provide any benefit. And if we consider the behavior of costs over a long period of time, then all costs can generally be considered variable. Therefore, fixed and variable costs are also called conditionally fixed and conditionally variable. In addition to the time factor, various production situations can also influence the conditionality of costs. We will return to the development of methods for dividing costs into fixed and variable costs a little later, but first we will understand their behavior.
It should be noted that fixed (Zpost) and variable (Zper) costs behave differently in relation to the entire volume of production of goods and services and in relation to one service (good) in the total volume of their production. Let's present the behavior of these costs graphically (Fig. 37-40).
Fixed and variable costs together make up the gross (total, total) costs of the enterprise:
Ztot = Zpost + Zper,
where Ztotal, Zpost, Zper are the general, fixed and variable costs (costs) of the enterprise.
The behavior function of total costs can be represented by the following graphs:
These graphs characterize the so-called normal behavior of atrates. But due to various reasons they may have a different appearance.
Variable costs are divided into the following types:
1) proportional variables that change proportionally (in direct correspondence) with changes in the volume of production of products (services). A graphical representation of the behavior of such costs is shown in Fig. 33;
2) regressive (degressive) - variable costs - those costs whose relative growth is slower than the relative increase in production;
3) progressive variable costs - those costs whose relative growth occurs faster than the relative increase in production volumes.
Fixed costs can be residual and starting. Residual costs- part of the fixed costs that the tourism industry enterprise continues to bear, regardless of the fact that the enterprise’s activities are either completely or temporarily suspended.
Such costs include, for example, rent.
Start-up costs- part of the fixed costs that arise with the start (resumption) of a given activity (for example, a license).
Fixed costs can be:
1. Completely (absolutely) constant - those costs that occur even when no activity is carried out (for example, depreciation of fixed assets, rent).
2. Fixed costs necessary to support the activity (occur only during the implementation of the activity) (for example, electricity costs).
3. Spasmodic, constant for a given period (conditionally fixed) costs. Such costs remain constant until the production of products (services) reaches a certain value (i.e., they do not change over a certain time period). Then, with an increase in the volume of production (services) per unit, costs change sharply, after which they again remain unchanged for a certain period of time, then they jump again. The behavior of such costs is presented graphically in Fig. 44.
The shorter the period of time during which these fixed costs remain unchanged, the more frequent the jumps, and the behavior of fixed costs becomes closer in nature to the behavior of variable ones.
The period of time during which these costs remain unchanged is called the relevant period.
In Western practice, to analyze discontinuous fixed costs and justify their attribution to the cost of production, the latter are divided into useful (Zpol) and useless (idle - Zcol).
This arises due to the indivisibility of such a production factor as labor.
Zconstant = Zfloor + Zcold.
To increase the efficiency of resource use at hotel complex enterprises, it is advisable to use the following approaches:
· attraction of seasonal workers. In this case, the work contract is concluded only for a specific season, and if the employee performs well, the contract can be guaranteed for subsequent seasons;
· attracting workers for a specific time (hours). In this case, work is provided only during certain hours, for example, in the evening when the restaurant is at maximum capacity;
· sliding (floating) employee work schedule. It consists in the fact that all employees go to work together only during those hours when the largest number of visitors arrive (in the evening). During the rest of the hours they work according to the established schedule.
In general, the amount of useful and idle costs can be calculated using the following formulas:
where Qf is the actual total volume of services produced;
Qn - the maximum possible (normative) total quantity of services (products).
The behavior graph of useful and idle costs is presented in Figure 45.
Rice. 45. The ratio of useful and idle costs depending on the volume of production of products (services)
Average and marginal costs
Tourism industry enterprises, in order to increase profits, are interested in constantly reducing costs per unit of production. For ease of calculation, you can use the average cost indicator.
Average costs- this is the amount of total (gross) costs per unit of product (service).
A tourism industry enterprise is also interested in knowing how costs will change when production (sales) volumes change.
This can be determined through marginal cost.
Marginal Cost- this is the average amount of increase or decrease in costs per unit of product (service), when production (sales) volumes change by more than one unit.
The economic meaning of marginal costs is that they show how much it will cost an enterprise to increase production volumes or sales of products (services) per unit.
Break-even theory
With the transition to market relations, a system of correct accounting and management of costs necessary for the production of products (services) becomes especially important for each enterprise. That is, the enterprise needs to organize a management (production) accounting system, which, on the one hand, allows for accounting of costs incurred, and, on the other hand, for analyzing costs, their impact on the results of the enterprise’s activities and making appropriate management decisions. Unlike the full cost costing system, the direct costing system is based on dividing costs into fixed and variable costs and accounting for them separately. This approach allows you to correctly take into account the impact of fixed costs on the final output of products (services), especially necessary when it changes.
Using a conditional example, let us consider the method of carrying out calculations using the direct costing system, and the advantages of this approach for making the right management decisions, in contrast to the method of calculating the calculation of products (services) at full cost.
When calculating using the direct costing method (in the second option), the increase in profit was obtained due to separate accounting of the influence of fixed and variable costs on the production of products (services), which made it possible to identify a decrease in fixed costs per unit with an increase in the total output of products (services) by 400 numbers (bed days).
This corresponds to the general economic law of the scale of production, which says that with an increase in output, specific total costs decrease (profit does not grow linearly).
Thus, choosing the right option for accounting for cost behavior leads to making the right management decisions. Another important feature of the direct costing method is that it allows you to clearly graphically represent the relationship between the behavior of costs and the results obtained depending on changes in the volume of production (sales) of products (services) (Fig. 46).
Rice. 46. Break-even chart of total and specific costs: V - revenue:
for the break-even schedule of total costs - the number of products (services) produced multiplied by the unit price; for the break-even chart of unit costs - the price of a unit of product (service)
The intersection of direct revenues and total costs occurs at a point called the break-even point or the point of critical volume of production (sales) of products (services), breaking point, critical point, etc. This point shows what volume of products (services) is needed to cover all the costs of the enterprise. Starting from this point, the production (sale) of products (services) begins to bring profit to the enterprise. The break-even point is an important economic indicator for making management decisions for a tourism industry enterprise. The concept of determining the critical point is widely used in selecting courses of action from a variety of alternative solutions.
The best solution is considered to be the one at which the value of the critical volume (Qcr) is the smallest, all other things being equal.
The break-even point can be measured both in physical terms and in monetary terms:
in physical terms - Qcr - critical volume of production (sales) of products (pieces), at which profit is zero;
in value - Pr - profitability threshold - the critical volume of sales revenue at which profit is zero. (see Fig. 46).
The calculation of the critical volume of output (sales) of products (services) is carried out according to the following scheme:
Since at the critical point the profit is zero, then, equating this expression to zero, we get
where P is profit;
Tsed - price per unit of product (service);
Qcr - critical volume of output (sales) of products (services);
at which profit is zero.
Profitability threshold(Prent) can be calculated using the following formula:
where Kvm is the coefficient of gross margin (marginal income) -
share of marginal income in total revenue:
M - marginal income, (marginal income, gross margin1) - the difference between revenue and variable costs.
Financial strength margin
In order to assess how much actual revenue exceeds the revenue at which the company operates break-even, you can calculate the margin of financial safety (FSA). This indicator can be calculated both in absolute values and as a percentage. In absolute terms, the financial safety margin is calculated as the difference between revenue and the profitability threshold:
This indicator characterizes the amount by which sales revenue can be reduced so that the enterprise remains break-even.
Calculation of the financial safety margin as a percentage shows the percentage deviation of actual revenue from critical (threshold) revenue; in other words, it estimates by what percentage sales revenue can be reduced while remaining in the break-even area:
where Vfact, Prent is the actual and critical volume of revenue of the enterprise.
For operational management and forecasting of the activities of a hotel complex enterprise, there is an indicator called the operating leverage effect.
Operating leverage effect shows that any change in sales revenue always generates a stronger change in profit, i.e. Revenue is growing slower than profit. The effect of operating leverage is calculated for a certain volume of production (revenue from sales) of products (services), i.e. for each specific point. The volume of production (revenue from sales) changes, and the strength of operating leverage also changes. The operating leverage effect (ELE) is calculated as the ratio of marginal income to profit:
The operating leverage effect shows how many times the increase
profits are greater than the increase in sales of products (services). Force
operating leverage depends on the amount of fixed costs and how they
the more, the stronger the effect:
With an increase in sales volume, the effect of operating leverage can be calculated through the indices of changes in sales volume (IV) and profit (Iп):
where IV, Iп are the index of changes in sales volume and profit, respectively;
V1, V2 - respectively the base and changed value of sales volume (revenue);
P1, P2 - the base and changed profit values, respectively.
Then the effect of operating leverage can be calculated as the ratio of the increase in profit (ΔP) to the increase in sales volume (ΔI):
where ΔП = Iп – 1, ΔI = Iv – 1.
Cost differentiation
The mathematical relationship describing the behavior of total costs is determined by the first degree equation:
where Y - total costs (Ztotal);
a - fixed costs (Zpost);
b - variable cost rate;
X is the quantity of produced (sold) products (services).
This formula can be represented as follows:
Ztotal = Zpost + b × X,
where b × X = Ztrans.
In order to divide costs into fixed and variable, it is necessary to determine the rate of variable costs - the average variable costs in the cost of a unit of production.
There are three main methods of cost differentiation:
1) method of maximum and minimum points;
2) graphical (statistical) method;
3) least squares method.
Break-even is a state where a business makes neither profit nor loss; the income received from the activity exceeds or is equal to the expenses associated with it.
The difference between the actual number of sold tourism products and the break-even sales volume is a safety zone, and the larger it is, the stronger the financial condition of the enterprise. Break-even sales volume and safety zone are fundamental indicators when developing a business plan, justifying management decisions, and assessing the company’s activities.
Ansiiz break-even production is carried out in order to study the relationship between changes in production volume, costs and profits. This analysis is a fairly simple in form and deep in content tool for planning and making management decisions at a commercial enterprise.
The purpose of the analysis is to determine break-even points. The break-even point, or profitability threshold, is the point of sales volume at which the enterprise has costs equal to the revenue from the sale of all products, i.e. there is no profit or loss. It is a criterion for the effectiveness of an enterprise. If a company does not reach the break-even point, then it is operating ineffectively.
To determine the break-even point, the marginal income method, mathematical (equation method) and graphical methods can be used. Let's take a closer look at them.
1. Marginal income method for determining the break-even point. There are two ways to determine the amount of marginal income. First way:
Second way:
Accordingly, if we subtract fixed costs from marginal income, we obtain the amount of revenue:
The break-even point, or profitability threshold, can be determined using the following formula
where TB is the break-even point in sales units;
FZ - fixed costs;
MD - marginal income per unit of sales.
2. Mathematical method for determining the break-even point. He
is based on the fact that any income statement can be represented as an equation
The form of the equation emphasizes that all costs are divided into those that depend on the volume of sales and those that do not depend on it.
Example 1. Let's consider the procedure for calculating the break-even point for a travel agency. Initial data:
- the price of one tour is 12,000 rubles;
- variable costs for one tour - 4000 rubles;
- fixed costs - 8,000 rubles.
Solution. Since at the break-even point profit is zero, it can be found provided that revenue and the sum of variable and fixed costs are equal.
Using the equation method, we introduce the following components: X- break even;
- 12 000x - revenue;
- 5000x - total variable costs.
Let's solve the equation:
- 12 OOOx - 5000x - 4000 = 0,
- 7000x = 40,000,
X= 40 (units).
Conclusion: break-even operation of the enterprise will be achieved with a sales volume of 40 tours.
3. Graphical method for determining the break-even point. This method of determining the break-even point involves building
break-even chart in which the volume of sales of a tourism product is shown horizontally, and the cost of production and profit, which together make up sales revenue, are shown vertically.
With the graphical method, finding the break-even point comes down to constructing a complex graph of “costs - volume - profit”. The sequence of plotting is as follows:
- 1) a coordinate system is determined for constructing a complex graph “costs - volume - profit”. The abscissa axis reflects the production volume or sales volume in physical terms, and the ordinate axis represents the revenue indicator and the sum of fixed and variable costs;
- 2) first of all, the line of fixed costs is plotted on the graph in the form of a straight line parallel to the x-axis;
- 3) from the line of fixed costs, a line of total costs is constructed;
- 4) a straight line is drawn (coming from the point with coordinates zero, zero) corresponding to the revenue value;
- 5) break-even point - the intersection of the line of revenue and total costs; the zone below is the zone of losses, and the zone above is profit.
The break-even point on the graph is the point of intersection of straight lines built according to the value of costs and revenue (Fig. 5.1).
Rice. 5.1.
The break-even point (profitability threshold) shown in the figure is the point of intersection of the gross revenue and total costs graphs. The amount of profit or loss is shaded. At the break-even point, the revenue received by the enterprise is equal to its total costs, while the profit is zero. Revenue corresponding to the break-even point is called threshold revenue.
The sales volume at the break-even point is called the threshold production (sales) volume. If an enterprise sells a tourism product less than the threshold sales volume, then it suffers losses; if it sells more, it makes a profit.
Break-even operation of an enterprise depends on many factors, including the choice of the optimal production volume and the appropriate pace of development of the enterprise. To analyze break-even, you must be able to determine the break-even point (self-sufficiency) of the enterprise. The break-even point (critical volume of production or sales) is the volume of sales at which the income received provides reimbursement of all costs, but does not make it possible to make a profit. In other words, this is the lower limit of output at which profit is zero. To determine the break-even point, three methods are used in practice:
mathematical;
graphic;
gross profit (marginal revenue) method.
The profitability threshold is the revenue from sales at which the enterprise no longer has losses, but does not yet receive a profit, i.e. this is a critical volume of sales, but not in physical terms, but in value terms. The margin of financial strength is the amount by which an enterprise can reduce revenue without leaving the profit zone, while necessarily receiving some amount of profit from the sale of products.
The indicators “margin of financial strength” and “margin of safety” (the first in value terms, the second in physical terms) assess the financial condition of the enterprise, which influences management decision-making. If the company approaches the break-even point, then the problem of managing fixed costs increases, as their share in the cost increases. Conditionally fixed costs are depreciation deductions, management and repair expenses, rent, interest on loans, taxes attributed to the cost of production, etc. The greater the difference between the actual production volume and the critical one, the greater the margin of financial strength of the enterprise , and therefore its financial stability.
The value of the critical sales volume and the profitability threshold is influenced by changes in the amount of fixed costs, the value of average variable costs and the price level. Thus, an enterprise with a small share of fixed income can produce relatively less products than an enterprise with a larger share of fixed costs in order to ensure break-even and safety of its production. The margin of financial strength of such an enterprise is higher than that of an enterprise with a larger share of fixed costs. Thus, the margin of financial strength of an enterprise with a smaller share of fixed expenses is greater than that of an enterprise with a significant share of fixed expenses.
Along with the indicators listed above, to analyze the break-even performance of an enterprise, indicators of marginal income (gross margin), relative income and transmission ratio (production leverage) are used. Marginal revenue (gross margin) is the difference between sales revenue and the variable costs of its production, that is, it includes the sum of fixed costs plus profit. Relative revenue is the ratio of marginal revenue to sales revenue, expressed as a percentage.
The transfer ratio is the ratio of marginal revenue to profit from product sales. The gear ratio expresses the relationship between variable and fixed costs. The higher the fixed costs relative to the variable ones, the higher it is. With an equal increase in sales volume, higher rates of profit growth will be for those enterprises that have a higher value of the “transmission ratio” indicator.
In the conditions of scientific and technological progress, fixed costs are growing at a higher rate than variable ones due to the use of more productive and, accordingly, more expensive equipment. It follows that marginal revenue is higher where the proportion of fixed costs is higher. A company will be profitable if marginal revenue is higher than fixed costs. Thus, a drop in production volume most affects the activities of the most efficient enterprises, which are technically better equipped. Therefore, the management of technically equipped enterprises must necessarily predict the rate of profit growth depending on the growth of sales and the relationship between fixed and variable costs.
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