Seminar 4.2.
Corporate Profit Management - 4 hours
Issues for discussion
- Describe the mechanism for managing the profit of the enterprise.
- Give a definition of the break-even point.
Determining the break-even point
The break-even point is the minimum volume of production and sales of products, at which expenses will be compensated for by income, and with the production and sale of each subsequent unit of production, the enterprise begins to make a profit. The break-even point can be determined in units of production, in monetary terms, or in terms of the expected profit margin.
The effective management of the economic and financial results of the production and economic activity of the organization is facilitated by the use of the methodology for analyzing the break-even point of production, which is based on the idea of dividing costs into fixed and variable costs.
The break-even point analysis methodology serves to answer the question: how many units of a product or service a business must sell to recover its fixed costs. It is assumed that prices should be high enough to offset all direct (variable) costs and leave the so-called "Contribution margin" to cover fixed costs and profit.
Once enough units are sold to recover fixed or recurring costs, each additional unit sold will generate additional profit on top of the variable costs. At the same time, the magnitude of the increase in this profit depends on the ratio of fixed and variable costs in the structure of the organization's costs.
As soon as the volume of products sold reaches the minimum quantity sufficient to cover variable costs, the organization generates a profit that begins to grow faster than the growth in product volume. The same effect takes place in the case of a decrease in production volumes, that is, the rate of decline in profits and increase in losses outstrips the rate of decline in sales.
The break-even point analysis methodology allows you to develop and apply the concept of economic ("operational") leverage in an organization.
Concept lever arises when the costs of the organization have stable elements that are not directly dependent (within certain limits) on the volume of work performed. As a result profits rise or fall faster than changes in output occur.
It is necessary to determine the effect on profit (J) of changes in the volume of sales of finished goods (V). The elements that determine the relationship between these variables are: unit price (P), variable costs per unit of output (C) and fixed costs (F).
Equality must be observed:
Vcr * P = F + Vcr * C.
Hence the profit is equal to:
J = VP - (VC + F) or J = V (P - C) - F.
The last formula shows that the amount of profit depends on the number of units of production sold, the difference between the price of a unit of production and the amount of variable costs attributable to it, i.e. the amount allocated to cover fixed costs, and the amount of fixed costs.
Another way to determine the impact of operating leverage is to use the S coefficient, which characterizes the ratio of profit to total volume products sold:
Let's modify the formula:
This dependence shows that the profit / revenue ratio from product sales depends on the difference between revenue and variable (direct) costs (that is, the contribution margin) per unit of product sold, reduced by the amount of fixed costs as a percentage of sales revenue. This dependence confirms the fact that with an increase in the share of fixed costs, the profit / revenue ratio from product sales decreases. The larger the fixed cost, the greater the decrease in the S coefficient. A change in volume, price, or unit value will have a disproportionate effect on S, since F is constant.
- Describe the mathematical model for calculating the break-even point.
Break even
Break even
The break-even point is the minimum volume of production and sales of products, at which expenses will be compensated by income, and with the production and sale of each subsequent unit of production, the enterprise begins to make a profit. The break-even point can be determined in units of production, in monetary terms, or in terms of the expected profit margin. Synonyms: critical point, CVP point. Not to be confused with the payback point (of the project). They are not the same thing.
The break-even point in monetary terms is the minimum amount of income at which all costs are fully paid off (the profit is zero).
The break-even point in units of production is such a minimum amount of products at which the income from the sale of these products fully covers all costs of its production.
The essence of marginal analysis is to analyze the ratio of sales volume (production output), cost price and profit based on predicting the level of these values under given constraints. It is based on the division of costs into variable and fixed. In practice, the set of criteria for classifying an article as a variable or constant part depends on the specifics of the organization, the adopted accounting policy, the objectives of the analysis and on the professionalism of the relevant specialist.
The main category of margin analysis is margin income. Marginal income (profit) is the difference between sales proceeds (excluding VAT and excise taxes) and variable costs. Sometimes the margin income is also called the coverage amount - this is the part of the revenue that remains to cover fixed costs and generate profits. The higher the level of marginal income, the faster fixed costs are recovered and the organization is able to make a profit.
Marginal income (M) is calculated using the formula:
where S is the sales proceeds; V is the total variable costs.
The economic meaning of this indicator is the increase in profit from the release of each additional unit of production:
M = (S-V) / Q = p -v
where M is the specific marginal income; Q - sales volume; p is the price of a unit of production; v - variable costs per unit of output.
The found values of the specific marginal income for each specific type of product are important for the manager. If this indicator is negative, this indicates that the proceeds from the sale of the product do not cover even variable costs. Each subsequent unit of this type of product produced will increase the overall loss of the organization. If opportunities for significant reduction in variable costs are severely limited, then the manager should consider removing of this product from the range of products offered by the organization.
In practice, a deeper detailing of variable costs is carried out into groups of variable production, general production, general and other expenses. This implies the need to calculate several indicators of marginal income, from the analysis of which a decision is made about the impact on which groups of expenses can most noticeably affect the value of the final financial result.
The division of costs into fixed and variable, the calculation of marginal income allows you to determine the effect of the volume of production and sales on the amount of profit from the sale of products, works, services and the volume of sales from which the company makes a profit. This is done on the basis of the analysis of the break-even model (the system "costs the volume of production profit").
The breakeven model relies on a number of initial assumptions:
the behavior of costs and revenues can be described by a linear function of one variable - the volume of output;
variable costs and prices remain unchanged throughout the planning period;
the structure of products does not change during the planning period;
the behavior of fixed and variable costs can be accurately measured;
at the end of the analyzed period, the enterprise does not have stocks of finished goods (or they are insignificant), i.e. the volume of sales corresponds to the volume of production.
The break-even point is the volume of output at which the profit of the enterprise is equal to zero, i.e. the volume at which the revenue is equal to the total costs. Sometimes it is also called the critical volume: below this volume, production becomes unprofitable.
Using the algebraic method, the zero profit point is calculated based on the following relationship:
I = S -V - F = (p * Q) - (v * Q) - F = 0
where I is the amount of profit; S - revenue; V - cumulative variable costs, F - cumulative fixed costs
From here we find the critical volume:
where Q "is the break-even point (critical volume in physical terms).
The critical volume of production and sales of products can be calculated not only in kind, but also in value terms:
S = F * p / (p - v) = Q "* p
where S is the critical volume of production and sales of products.
The economic meaning of this indicator is revenue, at which profit is zero. If the actual revenue of the enterprise is greater than the critical value, it makes a profit, otherwise it makes a loss.
The above formulas for calculating the critical volume of production and sales in physical and value terms are valid only when only one type of product is produced or when the structure of output is fixed, i.e. the proportions between different types of products remain unchanged. If several types of goods are produced with different marginal costs, then it is necessary to take into account the structure of production (sale) of these goods, as well as the share of fixed costs attributable to a specific type of product.
The point of closure of an enterprise is the volume of output at which it becomes economically ineffective, i.e. at which the revenue is equal to fixed costs:
where Q "is the closing point.
If the actual volume of production and sales of products is less than Q ", the enterprise does not justify its existence and should be closed. If the actual volume of production and sales of products is greater than Q", it should continue its activities, even if it receives a loss.
Another analytical indicator for assessing risk is the “safety margin”, i.e. the difference between the actual and critical volumes of output and sales (in kind):
KB = Of - Q "
where Kb - safety edge; Of - the actual volume of production and sales of products.
K% = Kb / Qf * 100%,
where K% is the ratio of the safety edge to the actual volume.
The safety edge characterizes the risk of the enterprise: the smaller it is, the greater the risk that the actual volume of production and sales of products will not reach the critical level Q "and the enterprise will find itself in the zone of losses.
Data on the value of marginal income and other derived indicators have become quite widespread for forecasting costs, selling prices, permissible rise in the cost of production, assessing the efficiency and feasibility of increasing the volume of production, in solving problems like "make it yourself or buy" and in other calculations for optimization management decisions.
This is largely due to the relative simplicity, clarity and availability of calculations of the break-even point. At the same time, it should be borne in mind that the formulas of the break-even model are suitable only for those decisions that are made within an acceptable range of prices, costs and volumes of production and sales. Outside this range, unit sales prices and variable unit costs are no longer considered constant, and any results obtained without such constraints may lead to inaccurate conclusions. Along with the undoubted advantages, the break-even model has certain shortcomings, which are associated, first of all, with the tolerances inherent in its basis.
When calculating the break-even point, they proceed from the principle of a linear increase in production and sales without taking into account the potential for a jump, for example, due to the seasonality of production and sales. When determining the conditions for reaching a break-even point and constructing the corresponding graphs, it is important to correctly set the data on the degree of utilization of production capacities.
The break-even point analysis is one of the important ways to solve many management problems, since when combined with other methods of analysis, its accuracy is quite sufficient to justify management decisions in real life.
The break-even point determines what the sales volume should be in order for the company to work break-even, to be able to cover all its expenses without making a profit. In turn, how the profit grows with the change in revenue is shown by the Operating leverage (operating leverage).
To calculate the break-even point, you need to divide the costs into two components:
Variable costs - increase in proportion to the increase in production (the volume of sales of goods).
Fixed costs - do not depend on the amount of products produced (goods sold) and on whether the volume of transactions increases or decreases.
The break-even point is of great importance in the question of the viability of the company and its solvency. So, the degree of excess of sales volumes over the break-even point determines the margin of financial strength (stability margin) of the enterprise.
Let us introduce the notation:
B - sales proceeds.
Рн - sales volume in kind.
Zper - variable costs.
Zpost - fixed costs.
P - price per piece.
ЗСпр - average variable costs (per unit of production).
TBD is the break-even point in monetary terms.
Tbn is the break-even point in kind.
The formula for calculating the break-even point in monetary terms:
TBd = B * Zpost / (B - Zper)
The formula for calculating the break-even point in physical terms (in pieces of products or goods):
Tbn = Zpost / (C - ZSper)
In the picture below, the break-even point is Tbn = 20 pieces
At the break-even point, the income line crosses and goes above the line of total (gross) costs, the profit line crosses 0 - it moves from the loss zone to the profit zone.
Theoretical and methodological foundations for determining the break-even point
For the successful development of the economy of any enterprise, it is necessary to study the ratio of the volume of production (sales) of products with costs and profits. This relation is analyzed to study the complex of causal-investigative relationships of the most important indicators of the final results of the enterprise, the scientific substantiation of management decisions.
Tasks and stages of determining the breakeven point of production
According to Vakhrushina, in the process of determining the break-even point, the following main tasks are being solved:
The volume of sales is calculated, which ensures full coverage of the company's costs;
The volume of sales is calculated, ensuring, other things being equal, the receipt of the amount of profit necessary for the enterprise;
An estimate is given of the volume of sales at which an enterprise can be competitive in the market, that is, the calculation of a security zone (field).
According to Sheremet A.D. The main steps in determining a safety point are:
1. Collection, preparation and processing background information in accordance with the terms of the analysis of the ratio of the volume of production (sales) of products with costs and profits;
2. Calculation of fixed and variable costs, break-even level and safety zone;
3. Justification of the volume of sales required to ensure the planned amount of profit.
Classification of costs for fixed and variable
According to the degree of dependence on the volume of production, the total costs are divided into fixed and variable.
According to Sheremet A.D., fixed costs are costs, the value of which does not change with a change in the degree of utilization of production capacities, or changes in the volume of production (rent, communication services, administration salaries, etc.). Variables - costs, the value of which changes with a change in the degree of utilization of production capacities or production volume (these are direct material costs - raw materials, materials, fuel and electricity for technological purposes and labor costs - the main and additional supply
According to Ivashkevich, in current practice, the division of costs into constant and variable is carried out by two main methods: analytical and statistical.
Analytical method... All costs of the enterprise are subdivided article by article into fixed and variable. This method based on the use of variators (growth rate of costs / rate of growth (decrease) in the volume of production).
Statistical methods: minimum and maximum point method (mini-maxi method); graphical (statistical) and least squares method.
Mini-maxi method. Algorithm:
1) the max and min values of the volume of production and costs are selected;
2) the differences in the levels of production and costs are found;
3) the rate of variable costs per 1 unit is determined (the difference in the level of costs for the period / the difference in the levels of production for the period);
4) the total value of variable costs for the maximum and minimum volume of production is determined (the rate of variable costs for 1 unit of production * the corresponding volume of production);
5) the total amount of fixed costs at the maximum and minimum points is determined (the total amount of costs is the sum of variable costs at the maximum and minimum points).
Graphical method - the total cost is an equation of the total (gross) cost.
The graph plots data on the total costs when different volumes, then a line is drawn and the point of its intersection with the y-axis shows the level of fixed costs.
Example 3. Y = 5 + 10x with a production volume (units): 2, 4, 6, 8, 10.
100 80 60 40 20 10x (variable costs)
5 fixed costs 2 4 6 8 10
Least square method. Least squares differentiation gives the most accurate results.
The value of variable costs (rv) is determined:
Rv = (n? X Uval -? X? Uval) / (n? X2 - (? X) 2),
where n is the number of periods;
X is the volume of production.
Total fixed costs:
Rfix = (? Dump? X2 -? X Dump? X) / (n? X2 - (? X) 2)
Then, we plug these values into the total cost equation.
Determination of the production no-need point
According to Ivashkevich, dividing costs into fixed and variable costs, calculating the amounts and rates of coverage allow us to determine the effect of production and sales on the amount of profit from the sale of products, works, services and the volume of sales from which the company makes a profit.
The breakeven point (critical point, equilibrium point) is the volume of production (sales) that provides the organization with a zero financial result, i.e. the enterprise no longer incurs losses, but does not yet have profits.
According to Karpova, in the management accounting system, three methods are used to calculate the break-even point:
mathematical method (equation method);
method of marginal income (gross profit);
graphical method.
Mathematical method (equation method)
To calculate the break-even point, the formula for calculating the company's profit is first written:
Unit price * X - Variable costs per unit * X - Fixed costs = 0,
where X is the volume of sales at the break-even point, pcs.
Then, on the left side of the equation, the sales volume (X) is taken out of the bracket, and right part- profit - equates to zero (since the purpose of this calculation is to determine the point where the company has no profit):
X * (Unit Price - Variable Unit Cost) = Fixed Cost
Fixed costs
X = Unit Price - Variable Unit Cost
Example. The entity's fixed costs are CU28,000 and the variable costs are CU19. for 1 pc. Unit price CU 32 Determine the break-even point.
Solution: 28,000 / (32 - 19) = 2,154 pcs. - zero profit point
And also, knowing the critical volume, we can find the critical revenue value (2,154 * 32 = 68,928 CU)
Marginal income method (gross profit)
Margin income is the amount of coverage, i.e. margin income must cover fixed costs so that the organization does not have a loss.
Marginal income = Revenue from the sale of products - Variable costs;
Marginal Income Per Unit (Coverage Rate) = Unit Price - Variable Unit Cost
The coverage rate should cover the fixed costs per unit.
Revenue from the sale of products (works, services) - Variable costs - Fixed costs = Profit
Marginal income = Fixed costs;
Marginal income per unit * X = Fixed costs;
Fixed Costs Break-Even Point = Marginal Income Per Unit
Example. The fixed costs during the month were CU960,000 and the variable costs were CU600. for 1 pc. The price of the product is CU 1,200 per piece. Determine the point of zero profit.
Solution: Margin income per unit = 1200 - 600 = 600
960,000/600 = 1,600 - break-even point.
To make promising decisions, it turns out to be useful to calculate the ratio of marginal income and sales proceeds, i.e. determination of marginal income as a percentage of revenue. For this, the following calculation is performed:
Marginal income (RUB)
Sales proceeds (RUB)
Graphical method
This method based on the construction of two lines: the line of total costs (Y = a + bx) and the revenue line (Y` = price * x). The intersection of these lines is the break-even point.
Line revenue cost profit revenue variable cost.
Break-even point loss fixed costs volume of production.
Break-even point calculation
What to assign the selling price of a product
The selling price of a product is the mechanism that brings money to the business. Logically, you should raise the price as high as possible to get the maximum margin (the difference between the selling price and the cost of your product). Having a sufficient margin from the sale, you will be able to cover the costs of running the business. All that remains after paying off all expenses is your profit.
The second way is to reduce the unit cost of the product ( best idea for business) in order to get a higher margin rate by offering a mid-market price for a product.
Since your business is unknown to the bulk of potential buyers, the first thing you should pay attention to is whether you can offer buyers a lower price than your competitors. This is the most significant competitive advantage.
If your idea is about other benefits for customers and the cost of your product is standard, then you need to look for a combination of benefits of your product or service that will be of particular value to customers, and they will be willing to pay a price higher than the market average for your product.
If you cannot offer potential buyers a better price or higher value from the purchase of your product, then you will have to spend a lot of time and money to make your product attractive to potential buyers.
Margin is the basis of business income
The difference between the selling price and the cost of a product is the amount of margin that allows you to weed out products that are unusable for business. What is the minimum margin that can be considered acceptable for a new business? There is no direct answer to this question. There are only approximate figures. If your product belongs to the category of frequent consumption by customers, then the margin may not be very large, and the business will receive all the income from the number of sales. If sales are not very frequent, then the margin should be as large as possible. In any case, for a start-up business, the margin should be at least 40-45%.
Objectively speaking, this is a rather controversial assessment. Although, no doubt, a business will be able to start and operate with a lower margin rate. But if your idea cannot provide such a margin at the start of a business, then you are unlikely to be able to create a successful business. In addition, the time to reach self-sufficiency will increase significantly and you will have to invest more money in the business and not for three to four months, but longer. Are you ready to run your business for 6 months without getting any return on your business? Do your loved ones agree to expect income for so long?
When you have decided on the selling price of your product or service, and your margin on the sale is more than 40-45%, then you need to calculate how much sales the business needs to make so that the business can recoup all its expenses, i.e. became self-sustaining.
Calculation of the business break-even point for one product (TBU)
Take the required data from the assessment plan table:
Fixed costs - Amount b
Cost of a product or service - sum d
Complete the spreadsheet to calculate the profit of your business for each volume (quantity) of sales. Use the following formulas:
Cost of products = number of sales * per cost of one unit of product.
Total costs = fixed costs + total cost of products sold.
Sales revenue = sales price * number of sales
Profit = Sales Revenue - Total Expenses
If you do all the calculations in a spreadsheet, then you can calculate the number of sales to reach TBU for various conditions.
In our example, the business will be profitable after the 50th sale. Those. if you manage to sell 50 units of your product, then all subsequent sales are your net profit.
Experiment with different values for fixed costs, cost price, sales price of a product and see how these values affect the profitability of the business.
Evaluate the different options for distributing the cost between fixed and variable costs from the previous assignment. See how this affects the number of sales needed to break even.
To quickly calculate the number of sales, use the formula:
TBU (number) = SPR / (PC-SP)
For the data from the example, we get 10000 / (500-300) = 50 product units. If the product is bought one per person, then you need to do everything to create 50 potential buyers per month.
TBU calculation for several products
In the case of multiple products, you can calculate the required number of sales for each product if you pre-calculate the average selling price based on the sales margin for each product. If you have a small range of products or services, then you can calculate the average selling price.
Knowing the cost of each of your products, calculate the cost of the average sale:
(Selling price Product_A) * 0.12 + (Selling price Product_B) * 0.81 + (Selling price Product_N) * 0.7 = average price one sale.
From the previous example, let's assume, for simplicity of calculation, the same markup (margin) of 45% for all products. The average selling price (SP) in this case will be the average cost price (SP) * (1+ 0.45). Then
TBU (in monetary units) = TBU (number) * SPC.
For our example, 50 * 500 USD. = 25000 USD That is, you need to earn at least $ 25,000 per month so that you can recoup all the costs.
If you have size data average purchase(in USD) per customer for a similar business, then you can get the number of customers who are willing to purchase your products in order to provide the required income for your business.
Number of buyers = TBU (in monetary units) / size of the average purchase. Suppose that the average purchase price is $ 750, then you need to serve 25,000/750 = 34 customers.
Plug your calculations into a spreadsheet and establish a break-even point for your product or products. Evaluate whether your business will be able to attract so many buyers in 3-4 months in order to then sell such or more units of the product monthly. Reduce your fixed costs. Give up at first a prestigious office, expensive equipment. Reduce all fixed costs to a minimum. Try to reduce the cost of your product.
If you doubt the correctness of your theoretical calculations (and this should always be the case), since you do not have reliable information about the preferences of potential customers, then you need to check your assumptions about the price of the product in practice before starting a business. The way to check is to develop and execute a starter marketing plan.
It is your responsibility to make sure in practice that your calculations are close to reality. If the results turn out to be bad, then abandon this business idea - it is not profitable.
It is necessary to calculate break-even points not only before starting a business, but also during its operation. It doesn't take long and isn't difficult at all. It is much more difficult to achieve this in real life.
If the number of sales per month and the number of buyers required are realistic based on your experience, then start planning your starter marketing plan to determine how to attract them, how to finalize the product, and how much money it will take.
Enterprise break-even point
The break-even point is the main financial goal that a new business aspires to at the beginning of its existence. The main goal is to break even. That is, to find a point where incomes are equal and greater than expenses, costs.
Variable costs depend on the company's activities of the firm. If sales go up, so do variable costs. And vice versa. This, incidentally, gives you the ability to adjust those costs. Variable costs are determined from how much resources and money are spent per unit of output. They include both the cost of production and the cost of logistics.
Fixed costs are the weight on the legs of the enterprise. Rent of premises, salaries of employees, monthly payments for financial obligations, etc. It is advisable to minimize fixed costs in order to have the best dynamism in the development of the business.
Your task is to calculate all the variable and fixed costs of your company. Only then can the break-even point be calculated, the point above which the profit will begin. How much income is needed to cover all your expenses for a month, quarter, year? How much do you need to sell to generate that kind of income for your product?
We determine how much margin (profit) we get from each unit of production sold.
For example, if you sold a product for 10 rubles, and spent 5 rubles, then the margin will be 5 rubles.
If a month of fixed costs comes out to the amount of 100 rubles, then you need to divide 100 rubles by 5 rubles (margin) - and you will get that in order to reach the break-even point, you need to sell 20 product units. This is a calculation in kind, in units of production.
In value terms, we multiply 20 units by the selling price of 10 rubles and get 200 rubles. This will be the break-even point of your business scheme. That is, after the sale of 21 units, you will have a net profit!
The break-even point directly depends on what price you put on the product and how much you will be able to sell for a certain period, that is, how much you can make a turnover for a large one, and with what markup (markup).
It is clear that at certain costs, an increase in the price of your product will reduce the time it takes to reach the break-even point and give more net profit. Therefore, work with price and marketing to increase sales comes to the fore.
Break-even point analysis
Business plan development tools
1. Brief information about the tool
Break-even analysis is a useful tool for examining the relationship between fixed costs, variable costs, and profits. Break-even Point determines when an investment will generate a positive return. This can be displayed graphically or simply mathematically. Break-even analysis calculates the physical volume of production at a given price, required to cover all costs. Break-even price analysis calculates the price required for a given level of production to cover all costs. In order to explain how the break-even analysis works, it is necessary to determine the costs.
Fixed costs incurred after the decision to start a business operation is not related to the level of production. Fixed costs include, but are not limited to, depreciation of equipment, interest costs, taxes, and general overheads. Total Fixed Cost - Amount fixed costs.
Variable costs are directly related to the volume of production. These may include cost of goods sold or production costs such as costs of labor force and electricity, food, fuel, veterinary services, irrigation and other costs directly related to the production of a commodity or investment in a capital asset. Total variable cost (TVC) is the sum of variable costs for a given level of product or production.
Average Variable Cost - Variable cost per unit of output, or TVC, divided by the quantity of output produced.
Break-even Point analysis should not be confused with Payback Period, the time it takes to return an investment.
In Value Based Management terminology, the break-even point should be defined as the level of the operating profit margin at which the business / investment receives the minimum acceptable level of return, i.e. cumulative capital expenditures.
The BEP can be calculated using the following formula:
BEP = TFC / (SUP - VCUP)
BEP - break-even point (units of production);
TFC - total fixed costs;
VCUP - variable costs per unit of production,
SUP is the selling price to the production unit.
2. Using the tool when developing a business plan
The main advantage of break-even analysis is that it explains the relationship between costs, volume of products and profits. It can be expanded to show how changes in fixed-to-variable costs, in commodity prices, or in income will affect income levels and break-even points. Break-even analysis is most useful for simulations using partial budgeting or capital budgeting. The main advantage of using break-even analysis is that it shows the minimum level of economic activity required to prevent losses.
The main limitations of the break-even point analysis:
Best suited for single product analysis;
There may be difficulties with the classification of costs, both variable and fixed;
3. Approaches to developing a business plan
Exist the following options execution / preparation of a business plan:
Self-development by the initiator of the project;
Transfer of the project for development to third-party specialists.
In this case, it is possible following forms execution / preparation of a business plan:
Individual development one specialist;
Individual (personified) development, but with the involvement of a TOP manager who will be responsible for the implementation of the project;
Collegial (by the working group) development of the project with the involvement of the TOP-manager, who will be responsible for the implementation of the project.
Depending on the:
Availability of the necessary specialists with the proper skill level,
The economic and technological complexity of the project itself,
Specific requirements of the investor,
Experience in the target market and with the selected scope of activities, etc.
The works can be in 6 different combinations of shapes and options. However, only 2 of them are acceptable (indicated by green areas in the figure), both in terms of cost justification and in terms of the quality of project development and its suitability for justifying the effectiveness of the project to investors and for further use during implementation. At the same time, an independent (by the enterprise itself) personalized development with the involvement of a TOP manager is acceptable when developing small and not complex projects in familiar fields of activity. For large projects (with a large volume of investments, with the involvement of new technologies, external investors, with a promising entry into new markets), the most practical is the development by a group of third-party specialist consultants with the obligatory involvement of a TOP manager in the process, who will further implement the project.
4. Statistics of protection of business plans of investment projects and business plans of business development developed by Lex CG - 100%.
The most significant and successfully substantiated (protected) business plans (investment projects) in 2008-2009:
Business plan for the development of the activities of Tyumenstalmost LLC until 2013 (for obtaining commercial loans and state support);
Business plan for the construction of a multi-storey parking, car service and car dealership in Tyumen (to attract a strategic investor);
Business plan for expanding the production capacity of the livestock complex of CJSC MTS Gagarinskaya (for obtaining a soft loan);
Business plan of the investment project "Development of a recreational zone in the area of Lake Marukhi Abatsky municipal district Tyumen region "(to receive government funding);
Investment memorandum “Recreation center“ Lesnaya Skazka ”(to search for a strategic investor);
Business plan for the construction of the shopping and entertainment complex "Vershina", Khanty-Mansi Autonomous Okrug (to attract investors and receive government support);
Financial and economic substantiation of the development strategy of the Shuryshkarsky district of the Yamalo-Nenets Autonomous Okrug;
The project for the creation and development of the Agro-industrial holding of the Khanty-Mansi Autonomous Okrug (to attract investors and obtain government funding);
Business plan for organizing a Call Center in the Tyumen region (to attract a private investor);
Business plan for organizing the production of a unique organic fertilizer on the territory of the South of the Tyumen region in industrial volumes (to attract private investors);
Business plan for creating an enterprise for the processing of mercury-containing household and industrial waste in Tyumen (to attract private investors).
- Draw a graphical model for calculating the break-even point.
- IV. Determination of standard costs and calculation of financial support for the fulfillment of the state (municipal) task
Andrey Mitskevich Ph.D., Associate Professor of the Graduate School of Financial Management of the Academy of National Economy under the Government of the Russian Federation, Head of the Consulting Bureau of the Institute for Economic Strategies
Break-even analysis
The management of the company has to make various management decisions concerning, for example, the selling prices of goods, planning sales volumes, opening new retail outlets, increase or, conversely, savings for certain types of costs. In order to understand and evaluate the consequences of the decisions made, an analysis of the ratio of costs, volume and profit is required.
The break-even analysis shows what will happen to the profit when the volume of production, price and basic cost parameters change. English name break-even analysis - CVP-analysis (cost - volume - profit, that is, "costs - output - profit") or Break - even - point (breakpoint, break-even point in this case).
Who does not know this? However, only a few use the classics in the life of firms. Why? Maybe “professorial economics” is so out of touch with life? Let's try to understand what CVP analysis is and why its fate is ambiguous. At least in our country.
Assumptions made in CVP analysis
Break-even analysis is carried out in the short term, subject to following conditions in a certain range of production volumes, called the acceptable range:
- costs and output are in the first approximation expressed as a linear relationship;
- performance does not change within the considered output changes;
- prices remain stable;
- stocks of finished goods are insignificant.
Academician and our only compatriot - laureate of the Nobel Prize in Economics for 1975 L.V. Kantorovich said: "economists-mathematicians begin all their work with" suppose that ... ". So this cannot be assumed in any way. " Perhaps, in our case, the professors stepped on the same rake?
The answer to this question pleases: working hypotheses, tested by practice
management accounting. If they are violated, it is not difficult to make changes to the model.
The acceptable range of production volumes (area of relevance) is determined by the cost linearity hypothesis. If the hypothesis is not in doubt, the range is taken as the constraints of the CVP model. Basic classical relations:
1. AVC ≈ const, i.e. average variable costs are relatively constant.
2. FC are unchanged, i.e. there is no threshold effect.
Then the total cost of producing a product is determined by the ratio
TC = FC + VC = FC + a × Q, where Q is the volume of output.
A single-product problem lives on in textbooks, and a multi-product problem lives on in practice.
- Single-product problems answer questions from the field of break-even analysis in the form of the amount of product produced ((2). Most often, CVP analysis in theory boils down to determining the classic break-even point, which shows how many units of product need to be produced to cover all fixed costs. as a rule, it also applies to the target profit, i.e. it comes down to determining the volume of output that ensures a given profit.
- Multi-product tasks answer the same questions in the form of revenue (TC). In this case, it is assumed that its structure remains unchanged, at least in the sense of the constancy of the share of the marginal profit in the proceeds.
Accounting methods affect the applicability of CVP analysis. Break-even analysis is carried out using Variable Costing, since Direct Costing and even more so Absorption Costing give errors. If the company does not apply at least Direct Costing, then there will be a break-even analysis, therefore one of the reasons for the unpopularity of CVP analysis in Russia is the dominance of Absorption Costing.
Break-even points
1) The classic break-even point in terms of the number of units of production assumes the payback of total costs (TC = TC). Critical is the amount of sales at which the company has costs equal to the proceeds from the sale of all products (i.e., where there is no profit or loss).
In the single-product version, the value of the break-even point (Q b) is directly derived from this ratio:
This formula prevails in the literature and, in fact, has earned the name of the classic break-even point (see Fig. 1).
Rice. 1. Classic CVP analysis of the behavior of costs, profits and sales
An example of calculating the classic break-even point by the number of product units
The Corporation makes a decision to open several mini-wholesale stores. Their characteristics:
- narrow specialization (office paper, mainly A4 format)
- small retail space (premises up to 20 sq.m., or a remote point of sale);
- minimum sales staff (up to two people);
- the form of sales is mainly small wholesale.
Table 1
- Marginal profit per unit of production: 224 -180 = 44 rubles. We calculate the critical point using the formula:
- Break-even point = Fixed costs / Profit margin per unit
We get: 10000: 44 = 227.27.To reach critical point the store needs to sell 228 reams of paper (10 reams per day) within a month, with six working days a week.
2) Multi-product break-even analysis. So far we have assumed that there is one product, but in real life this is insignificant. special case... Paradoxically, the multi-product case is less demanded in the literature, and even more so in practice. The fact is that in this case the result of the break-even analysis is difficult to interpret. For a practitioner, it is not specific, since it gives hundreds of answer options instead of a clear guideline for assessment.
Consider the mathematics of this case. It is clear that the revenue should cover the total costs. In this case, we get not one break-even point, but a plane in N-dimensional space, where N is the number of types of products. If we make a fairly correct and accepted in classical management accounting assumption about the constancy of AVC i = V i, we get a linear equation:
Logically, these points are very similar to the points of the marginal I variable of breakeven. Unfortunately, the remaining inseparable fixed costs cannot be distributed between products one by one and balanced bases. If all products are cash cows, such a base could be a notional margin (revenue minus variable costs and minus own fixed costs for each product). But since the issue is unknown on the issue of the break-even point, neither the notional margin nor the revenue works.
In the second step, you will have to distribute the remaining costs:
NFC = FC - ΣMFC i
The options are:
a) equally, if there is no reason to prefer any one product;
b) in proportion to the planned revenue, if the sales plan is drawn up. Naturally, only the total fixed costs are shared;
c) if you have a plan, you can return to a balanced base (for example, marginal profit), but already without part of the product
attributed to the coverage of own costs (МРС i).
An example of calculating break-even points based on developed Direct Costing.
Let's say a firm produces two types of products: "Alpha" and "Beta", which are sold at the price of 9 and 20 thousand dollars apiece, respectively. Average Variable Costs (AVC) are projected at $ 4,000 and $ 10,000, respectively.
Individual fixed costs for Alpha were $ 2,000 for the planned quarter and for Beta $ 8,000. The remaining fixed costs (NFC) turned out to be equal to $ 10,000 thousand.
a) when dividing the non-divided fixed costs equally (5000 per type of product), we get:
Let's try to determine the break-even points different options... First, let's calculate the coverage of our own fixed costs:
b) when dividing in proportion to the plan, you need to know this plan: 2900 and 2175, for example, in pieces. As the distribution base, we take the revenue minus the coverage of our own fixed costs:
22,500 thousand dollars = 2,900 x 9 - 400 x 9 for Alpha;
$ 27,500,000 = 2,175 x 20 - 800 x 20 for Beta.
c) the base of the marginal profit assumes that the planned output is reduced by the amount of its own coverage (in pieces):
2900 — 400 = 2500 2175 — 800 = 1375
Conclusion: deviations in the calculations are small, so you can use any of the proposed methods in the case of an approximate equality of product volumes. Otherwise, it is better to use methods B and C:
B - for growing markets and products;
B - for "dairy cows".
3) The classic revenue break-even point is the most common approximate solution to a multi-product problem. It is assumed that the structure of revenue changes slightly. The problem is posed as follows: to find such a value of revenue at which the profit is zeroed. For this, the economist is required to have a coefficient ( To), showing the share of variable costs in revenue. It is not difficult to find it, knowing the share of variable costs in total costs and profit in revenue. As a result, we get the equation:
For example:
- share of variable costs in revenue = 9742/16800 = 58%;
- fixed costs = 5816 thousand rubles;
- break-even point = 5816 / (1-0.58) = 13848 thousand rubles of proceeds
Unlike the classic break-even point in terms of the number of product units, here you should make a reservation regarding the accuracy of the results:
- formula (7) is probably correct with an unchanged output structure;
- however, a less stringent condition can be formulated: the invariability of the coefficient k, i.e. share of variable costs in revenue.
- Break-even point based on descending margin ordering. The breakeven point shifts to the left when using the ordering of products in descending order of the profit margin.
Let's look at this interesting and rarely described effect with an example. So, the firm has fixed costs equal to $ 16,000 and produces 4 products with different shares of marginal profit in revenue (see Table 2).
Table 2. Initial data for calculating the break-even point based on marginal ordering
|
Product |
Revenue (TC) Doll. |
Profit margin (/ OT), USD |
Share of profit margin in revenue |
|
Let's calculate the break-even point for revenue based on formula (7):
Let's define it taking into account the fact that first we will produce the most profitable products: A and B. They are just enough to cover the fixed costs: μπ (A) + μπ (B) = 12000 + 4000 = 16000 = FС. Thus, we get an optimistic estimate of the break-even point:
20000 + 8000 = 28000.
The breakeven point based on ascending marginal ordering gives a pessimistic estimate. Let's use the same example for illustration. Products D, C, B are only enough to cover $ 12,000, and the remaining fixed costs of $ 4,000 are one third of the release of product A. That is, a pessimistic break-even point estimate:
Break-even points based on descending and ascending marginal ordering together give the range of possible break-even points.
4) Point 1. LCC-breakeven. Life Cycle Costing's cost-benefit approach defines a break-even point as an output that pays for the full cost over the life of the item. The LCC approach encroaches on the prerogative of investment design. In addition to fixed costs, he insists on covering investment costs.
Example LCC Analysis
Let's say a consortium of Russian firms has invested $ 500 million in research and development (R&D) of a new aircraft.
Fixed costs are made up of $ 700 million in R&D (one-off costs in a given year) and an annual fixed cost of $ 50 million. Variable costs per plane - $ 10 million. It is expected that 25 aircraft will be produced per year, and they can be sold on the market for a maximum of $ 16 million. How many planes should be sold to offset all costs without taking into account the time factor (this is also a break-even point, but taking into account what?) And how many years will it take?
Solution: Let's denote the unknown number of years as Y. Fixed costs will depend on the number of years the break-even point is reached: 700 + 50 x Y. Let's equate the total costs and revenues for Y years:
700 + 50 x Y + 25 x 10 x Y = 25 x 16 x Y.
Hence Y = 7 years, during which 175 aircraft will be produced and sold.
5) The point of marginal break-even (the point of recoupment of an additional unit of production). With modern complex production, the marginal costs (for the production of an additional unit of production) do not immediately become lower than the price. Release,
providing break-even for an additional unit of production, is determined by the ratio:
Q bm: P = MC (Q bm) (8)
This point shows the moment (release) when the company starts to work "in plus", i.e. when with the release of one more unit of production, profits begin to grow.
Unfortunately, there is no more detailed formula. This ratio
6) Break-even point of variable costs (point of coverage of variable costs):
TR = VC or P = AVC. (nine)
It shows that the process of recouping fixed costs is about to begin. This is important indicator both for managers who "started" a new product, and for owners. However, even here there is no more intelligible formula for calculations. The reason is the same: the ratio
(9) is always individual.
Target profit points
They show the output of a single product (or revenue in the case of multi-product production) that provides a given mass or rate of return.
1. Target profit point for the number of product units.
The traditional metric is the output that provides the target profit. Similar calculations are performed in many firms. Suppose the required profit is π, that is
This formula is easily modified in the case of target profit after tax. Here's a simplified calculation. If the target profit after tax should be equal to z, then (TR - ТС) × (1 - t) = z, where t is the income tax rate. Therefore, (P - AVC) x Q x (1 - t) = z + FC × (1 - t) or
2. The target profit point for revenue is easily calculated by analogy with formula (7):
In the multi-product case, it is subject to the same restrictions on the invariability of the coefficient k, i.e. share of variable costs in revenue.
Sensitivity analysis is based on the use of the technique "what will happen if one or more factors affecting the amount of sales, costs or profits change". Based on the analysis, you can obtain data on the final result for a given change in certain parameters. Sensitivity analysis is based on safety edges.
Safety margins (sometimes translated as safety margin or safety margin) show the safety margin, business break-even percentage or natural units, or in rubles of proceeds. The representation in percent is more visual and, most importantly, allows you to normalize this important indicator. Although these norms are extremely approximate, they are useful. Mathematicians speak about such numbers and formulas with disdain: "managerial indicators". But this “engineering approach” is inevitable.
The classic safety edge in terms of the number of product units:
It shows how much the revenue can decrease in case of non-loss production. An indicator less than 30% is a sign of high risk.
Classic safety edge by revenue:
Both of these safety margins are good for the business in general, as the fixed costs are understandable, but not very useful for business segments. However, the "head-on" application of variables or marginal costs, as you remember, requires the nonlinearity of their functions. Classical management accounting does not study these functions and therefore has to consider them linear. Does this mean that there are no other safety edges besides the classic ones? The answer will be no.
The price safety edge shows how much the price needs to be reduced in order for the profit to turn to zero. This will be at the critical price P k = AC. Then the safety edge will be as a percentage of the current price:
The safety edge for variable costs shows how much you need to increase the unit variable costs in order for the profit to go to zero. The critical value of AVC is achieved when AVC = P - AFC. That's why
The security edge at fixed costs in absolute terms is equal to profit, and in relative terms:
Note that in formulas (15-17), the issue remains unchanged.
Problems in determining break-even points
If a firm faces semi-fixed costs, there may be several break-even points. The break-even chart (see Fig. 2) shows three break-even points, and profit and loss zones replace each other as the volume of activity increases.
Rice. 2. Multiple classical break-even points in the case of semi-fixed costs.
A similar breeding applies to non-classical break-even points.
Difficulties in conducting a break-even analysis can be associated with the following reasons:
- with a high level of supply, it may be necessary to lower the unit price. Consequently, a new break-even point will appear, lying to the right;
- “Large” buyers are likely to be eligible for bulk discounts. The breakeven point moves to the right again;
- if the amount of demand exceeds supply, then it may be advisable to increase the price. This will move the breakeven point to the left;
- the cost of raw materials and materials per unit of production may decrease with large volumes of purchases or increase with supply disruptions;
- the unit cost of wages of production workers is likely to decrease with a large volume of production;
- both fixed and variable costs tend to increase over time;
- costs cannot always be accurately divided into fixed and variable;
- the structure of sales can change quite significantly.
All these basic analytical calculations are simply ignored by primitive business plans.
Nevertheless, it is believed that break-even analysis is carried out everywhere and its significance is great. My observations do not confirm this. Like any model, the CVP has its own "battlefield" and it is fragmented. Many firms carry out CVP analysis only for new projects. Regular work with the profitability of products and segments in our country, unfortunately, is not enough yet.
Case with solutions
So, two firms: ZAO Staromekhanicheskiy Zavod (hereinafter referred to as SMZ) and OAO Zarubezhny Automation (hereinafter referred to as ZAM) operate in the Little Russian market and manufacture a part used in car repairs. Today these two companies have divided Russian market- each holds 50%. The parts produced are of the same quality and price. The production facilities of both companies are located in the vicinity of Mariupol.
However, companies differ radically in their cost structures. Foreign Automation has a fully automated and highly capital-intensive production facility. And "Staromekhanicheskiy Zavod" is a non-automated production with a large share of manual labor. The companies' monthly income statements are as follows (see table 1).
Table 1. Initial situation (in USD)
|
Indicators |
"Foreign Automation" |
"Old Mechanical Plant" |
|
Sales, pcs. | ||
|
Price for one | ||
|
Unit variable costs | ||
|
Unit fixed costs | ||
|
Total unit costs | ||
|
Full costs |
9.5x5000 = 47500 |
9.5x5000 = 47500 |
|
50000 — 47500 = 2500 |
50000 — 47500 = 2500 |
Both companies are looking at ways to increase their profits. One is to start selling your products to a sizable but relatively low-income (or thrifty) segment of buyers who are currently not served. The potential capacity of this segment is 2000 pieces per month. Thus, the company that has taken over this segment will have sales in physical terms by 40%. The only problem is that in this segment, consumers will buy parts for no more than 8.50 USD. e. per piece, i.e. 15% lower than the market price and 1 cu. That is, below the full cost of production at the moment. “How can you sell at a price below cost”? - the head of the PEO with many years of experience at the "Staromekhanicheskiy Zavod" is outraged.
Question 1: Let's say both companies can segment the market without additional costs (that is, start selling parts to the economy segment at a 15% discount, while not undermining their sales at full price to wealthy buyers). How much will each company be able to increase profits if it increases sales (in pieces): a) by 20%, that is, capturing half of the economy segment?
b) by 40%, capturing the entire economy segment?
Should companies (one or both) take advantage of this opportunity to increase profits?
|
Question |
Response logic |
"Foreign Automation" |
"Old Mechanical Plant" |
|
The increase in profit (Δπ) is calculated through the marginal profit per unit of production in an additional batch (αμπ) |
αμπ = 8.5 - 2.5 = 6 Δπ = 6x1000 = 6000 |
αμπ = 8.5 - 5.5 = 3 Δπ = 3x1000 = 3000 |
|
|
αμπ = 8.5 - 2.5 = 6 Δπ = 6x 2000 = 12000 |
αμπ = 8.5 - 5.5 = 3 Δπ = 3x2000 = 6000 |
||
Conclusion: Both companies will be happy to "grab" even half of the economy segment, not to mention the happiness of taking possession of it entirely.
Question 2: What to do if neither SMZ nor ZAM can effectively segment the market, and both firms will be forced to set a single price for all buyers (i.e. $ 8.50 for both the economy segment and wealthy buyers ).
but. Calculate BOP (Break Even Sales) for each of
companies, if the price is reduced to 8.50 usd. e.
b. How much will the profits of each company grow if its sales
increase by 40% (in pieces)?
Attention: BOP (break-even sales) in this case assumes that the company should receive the previous, and not zero, profits.
Break-even sales are more common in practice than the classic CVP analysis. It is found in life, but not always in textbooks. This is a variant of the target profit point in dynamics: when the factors change, the profit remains at the same level. The break-even sales volume assumes that the company should receive the previous profits in case of changes, and not zero. For example, old machine replaced by a more efficient and expensive one. Naturally, the question arises, how much should output be increased in order to “recoup costs”?
|
Question |
Response logic |
"Foreign Automation" |
"Old Mechanical Plant" |
|
|
Calculated through the equality of the marginal profits before and after the changes |
μπ (up to) = 7.5x5000 = 37500 = μπ (after) = 6xQ μπ (after) = 7.5x5000 = 37500 |
μπ (up to) = 4.5x5000 = 22500 = μπ (after) = 3xQ |
||
|
b. Output growth by 40% |
Profit growth (Δπ) is calculated as the difference in marginal profits before and after changes |
μπ (after) = 6x7000 = 42000 μπ = 42000 - 37500 = 4500 |
μπ (after) = 4.5x5000 = 22500 |
|
This is what we call the competitiveness of the cost structure with lower average variable costs. "Foreign Automation" will withstand the drop in prices, but "Old Mechanical Plant" will not. Dumping (the game of lowering prices) is the lot of firms with low variable costs. Fixed costs have nothing to do with it.
Question 3: While the companies were thinking, their market was invaded by a strong competitor - the Automobile Plant. He easily took over half the market, trading the same parts for $ 9. We will have to return to the initial situation and analyze the reliability of the LPS and ZAM. Both firms lost half of their sales (in pieces). The results are presented in table. 2.
Table 2. Situation after the invasion of the "adversary" (in USD)
|
Indicators |
"Foreign Automation" |
"Old Mechanical Plant" |
|
Sales, pcs. | ||
|
Unit price, cu e. | ||
|
Specific | ||
|
variables | ||
|
costs | ||
|
Fixed costs (per month) | ||
|
Specific | ||
|
permanent |
14 = 35000: 2500 | |
|
costs | ||
|
Total unit costs | ||
|
Full costs |
16.5x2500 = 41250 |
13.5x2500 = 33750 |
|
22500 — 41250 = -18750 |
22500 — 33750 = -11250 |
Of course, both companies are at a loss, but transferring them is probably easier for "Staromekhanicheskiy Zavod". This is what we call robust cost structure with lower fixed costs.
Question 4: Morning. The invasion of the Automobile Plant turned out to be a nightmare. Assuming no company can segment the market, what advice would you give each company about this opportunity?
Answer: “Foreign Automation” should reduce the price, but “Staromekhanicheskiy Zavod” should not. ZAM has every chance of winning the price competition due to lower variable costs.
After analyzing the situation, ZAM decided to take the opportunity to sell parts to a new segment and cut prices by 15%. Its sales rose to 7,000 units per month at a price of $ 8.50. e. Belatedly, SMZ was also forced to lower prices in order to retain its customers. SMZ management believes that if they had not lowered their prices, they would have lost 60% of sales. Unfortunately, after the price reduction, SMZ is operating at a loss.
Question 5: Was the decision of "Staromekhanicheskiy Zavod" to reduce prices financially justified? For example, if the SMZ decides to completely withdraw from this market, it will be able to cut fixed costs in half. For example, refuse to rent premises, land and other expenses. The remaining 50% of fixed costs are servicing a bank loan for the purchase of equipment with zero liquidation value. Calculate and compare profits for different options.
Position after price decline:
μπ (up to) = 4.5x5000 = 22500
μπ (after) = 3x5000 = 15000
FC = 20,000, π = -5000.
Alternative option: do not reduce the price, but lose part of the market:
μπ (up to) = 4.5x5000 = 22500
μπ (after) = 4.5x2000 = 9000
FC = 20,000, π = -11,000.
Therefore, price reduction is beneficial in the short term.
When leaving the market π = -10000. Therefore, one should stay and reduce the price, although production will be unprofitable: FC = 20,000, π = 15,000 - 20,000 = -5,000.
Fortunately, the managers of the Stary Mechanical Plant read Michael Porter's book Competitive advantages”And decided to analyze how the entire value chain works. As a result of market analysis, they found that at least 3,500 parts are purchased monthly by drivers, who then have to rework the part on their own so that it better fits their car brand: namely, the Volga. Thus, there is an opportunity on the market to produce a specialized version of the part for this category of drivers. And while production costs at the SMZ will rise, the additional costs will still be less than what drivers currently spend on reworking the part.
For the production of specialized parts, the SMZ will have to invest additional capital, the payment for which will be $ 3,000. per month.
Question # 6: In order to produce specialized parts, SMZ will have to buy new equipment and a new building, which will cost $ 23,000. fixed costs per month instead of $ 20,000 e. per month. The plant management is convinced that they will be able to sell specialized parts for $ 6 more than conventional parts (ie at $ 16), but the unit variable costs will rise by $ 3.00. e. per month. Will it be profitable for the SMZ to focus on the production of only specialized parts?
Answer: FС = 23000, π = (1b-8.5) х3500 - 23000 = 3250. Yes, manufacturing only specialized parts is profitable, since the profit will increase by 3250 - 2500 = 750 USD. e.
Question # 7: What is the minimum number of custom parts a LMP must sell per month to exceed the profits it currently earns as a generic parts manufacturer? Remember? We called this break-even sales.
Answer: FC = 23000, π = (16-8.5) xQ - 23000 = 2500. Q = 3400.
Question # 8: How much will the profits of "Staromekhanichesky Zavod" grow as a manufacturer of specialized parts, if it sells 3,500 pieces per month at a price of $ 16 per piece? ?
Answer: 3250 — 2500 = 750.
"Unfamiliar options for break-even analysis"
There are other options for analyzing break-even. For most, they will be unexpected. We call them the “three break-even points”:
The first and the fastest attainable point is the marginal break-even point, which shows at which output the price will begin to recoup the additional costs of producing another unit of output (P> MC - in conditions of perfect competition or MR> MC - in conditions of imperfect competition). The first condition (P> MC) corresponds to the spirit of management accounting and is quite worthy of use. The second (MR> MC) is suitable only for pure economic theory, although to deny the possibility of it practical use it would be presumptuous.
The second point - the break-even point of variable costs - shows the output at which it will be possible to cover all variable costs (TR> VC). Naturally, this formulation of the problem is typical for Variable Costing. In the case of Direct Costing, a similar point will be called the direct cost break-even point (TR> DC).
The third point - the classic one - sets the release at which it will be possible to cover all costs (TR> TC). It has filled all textbooks, so most students and professionals think that the classic break-even point is CVP analysis. This is a clear exaggeration, or rather an understatement of the role and capabilities of CVP analysis.
Example. Evaluating the operation of branded stores and posting general administrative costs
At the beginning of the year, a large Moscow company set an ambitious goal: to open 200 new branded stores throughout the country in a couple of years. The head office economist asked how to distribute head office costs between stores? The answer, surprisingly enough, relies on "three break-even points":
1. A newly opened store must first recoup its current content. This is the first and specific task for management. It is not necessary to post costs to such stores. This is also a break-even point, not for groceries, but for stores. All other things being equal, the collective that passes the first stage faster will "win the capitalist competition." Nobody canceled moral incentives.
2. Once the store contributes to the coverage, another stage of development will begin. Here it is required to recoup the accumulated current losses of the previous stage. This is also a kind of break-even point of variable costs, only not for products, but for stores.
3. Only at the next, third stage it is necessary to fight for the classic payback. And only here it is possible to spread the costs of the central office between stores. Advanced Direct Costing welcomes this solution, but does not advise on which overhead posting base to use.
It is precisely on such a decision that the business plan of each store or branch, representative office, business line and so on should be aimed.
Break even (break-even point) - a point on the break-even graph in the coordinates revenue-costs / months (period) or the volume of sales of products and services calculated by the formula equal to the volume of production, at which the company's expenses are compensated by its income. The production and sale of the next product unit brings the first profit to the company.
The economic meaning of the break-even point is revenue, at which profit is zero or revenue is able to cover all fixed and variable costs of the company. Going to the break-even point means reaching the payback of the company's total costs.
Break-even point value:
- the break-even point shows how much the profit starts from, which is credited to the company's account.
- knowledge of the break-even point can determine the minimum level of revenue, below which production will not pay off;
- the break-even point indirectly shows below which price should not fall when selling a product.
The break-even point is calculated in units of production, in monetary terms or taking into account the expected size of the profit. Classically, the break-even point calculated from the number of units of production assumes a return on total costs.
Break-even point formula in monetary terms:
TB d = (V x W post) / (V - Z lane)
Where:
TB d - break-even point in monetary terms;
В - sales proceeds;
З post - fixed costs;
Z lane - variable costs.
Break-even point in physical terms (in product units):
TB n = Z lane / (C - Z cn)
Where:
З lane - variable costs;
P is the price per unit of production;
З cn - the average variable costs per unit of output.
There is a certain mutual influence and interdependence between costs, volume of production and profits. It is known that, subject to all other things being equal, the rate of profit growth always outstrips the rate of growth of product sales. With an increase in the volume of sales of products, the share of fixed costs in the structure of production costs decreases and the "additional profit effect" appears.
How to determine the break-even point on the chart?It is necessary to build a graph of making a profit for the period, in the coordinates:
- horizontally - control points of the period (days of the month, months or years),
- vertically - revenue in rubles.
- also vertically - the company's expenses for the same period in rubles.
The breakeven point is the point at which the revenue line crosses and goes above the total (gross) cost line... If you postpone the profit line on the same chart, then the break-even point will show a control point on the horizontal axis of the chart (period), where the profit line crosses 0 and moves from the loss zone to the profit zone.
Break-even analysis(CVP analysis - cost volume profit) or break even point (breakpoint, break-even point in this case) shows what can happen to the company's profit when the volume of production and (or) sales of products, services changes, prices and basic cost parameters change firms.
Entrepreneurs who are going to open a store or buy a ready-made one are worried about how much and at what pace they need to sell in order to cover losses and make a profit. To do this, a break-even point (TB) is calculated - that is, a state in which costs are equal to income, and net profit is zero. Let's consider the most common ways to calculate this indicator.
Break-even point: by eye
Suppose 80 thousand rubles are spent on renting premises per month, 60 thousand rubles are spent on salaries for sellers, insurance premiums- 18 thousand rubles, for a communal apartment - 10 thousand rubles, for the purchase of goods - 800 thousand rubles.
The store margin is 25%. We summarize all costs and divide them by the margin. We calculate the sales volume at which expenses are equal to income:
(80 + 60 + 18 + 10 + 800) * 1000/25% = 3 million 872 thousand rubles.
To reach the break-even point, you need to bail out at least 3 million 872 thousand / 30 ≈ 13 thousand rubles per day.
By margin income
The following data will be required:
- Fixed costs (Rpost), which include rent, communications, security, utilities, salespeople's salaries, insurance deductions, salaries and pension funds, taxes and advertising costs,
- revenue (B);
- variable costs for the full volume (Pper),
calculated according to the formula: Sales volume (Ор) * Average purchase price of goods (ZP)
To calculate the break-even point, you need systematized data on expenses and income. With the Biznes.ru program you can receive detailed traffic reports Money and spend necessary calculations to determine the effectiveness of your business. You can use the functionality of the program remotely at a time convenient for you.
First, we calculate the marginal income (DM). This is the delta between revenue and variable costs: MD = B - Pper.
Then we calculate the value of the break-even point in monetary terms: TBden = Ppost / Kmd
For example, revenue - 1.5 million rubles, variable costs - 700 thousand rubles, and fixed costs - 155 thousand rubles per month.
(1) MD = 1,500,000-700,000 = 800,000 rubles
(2) Kmd = 800 000/1 500 000 = 0.53
(3) TBden = 160,000 / 0.542 = 292,452 rubles.
Consequently, the store will start making a profit when sales exceed 292,452 rubles.
Calculation per unit of goods
When you just start a business or occupy a new niche in the market, you cannot always calculate the marginal income for the entire volume of goods sold. In this situation, you can use the values of the purchase and sales prices:
MD / unit = ZC-CR, where CR is the selling price of a unit of goods.
The profit margin ratio is calculated as follows:
Kmd = MD / unit / PC.
TBden = Ppost / Kmd
How to calculate the break-even point
Break-even point: chart
You can determine the break-even point according to the schedule. This will require the level of fixed costs, the average purchase and sale price.
Two curves are plotted: the first is all costs (Pn + Ppost), the second is the sales proceeds. The point at which they intersect is the desired value.
Break-even point: online
Those who do not like to bother with tables, calculations and graphs can use the calculator on the Internet (http://allcalc.ru/node/759).
It is enough to drive in the corresponding cells fixed costs, costs per unit of goods, volume of units, selling price and press calculate. The calculator will calculate the value of the break-even point by itself.
The program for optimizing the work and financial reporting of the Biznes.Ru store will allow you to maintain a full-fledged financial, sweet and trade accounting. At any time convenient for you, you can receive reports on expenses, costs per unit of goods, number of units, selling price and much more.
Direct costing
Let's say positions A, B, C and D are presented in our store:
|
(t. rkill. ) |
P lane (t. rkill. ) |
P post (t. rkill. ) |
|
Let's use direct costing methods and calculate the range of break-even points.
TBden = Ppost / (1-Kp.per), where Kp.per is the share of variable costs in revenue,
Kr.per = Pper / V.
We will also calculate the marginal income for each product and its share in the revenue.
|
(t. rkill.) |
TOR... per. |
||
- the volume of sales at which the company covers all its costs without making a profit.
Its value plays an important role in the issue of stability and solvency of the company. The degree of excess of sales volumes over the break-even point determines the (stability margin) of the enterprise. In turn, how the profit grows with the change in revenue shows.
The formula for calculating the break-even point
To calculate the break-even point, you need to divide the costs into two components:
- - increase in proportion to the increase in production (the volume of sales of goods).
- - do not depend on the amount of products produced (goods sold) and on whether the volume of transactions increases or decreases.
Let us introduce the notation:
| IN | — | sales proceeds. |
| NS | — | sales volume in kind. |
| Zper | — | variable costs. |
| Zpost | — | fixed costs. |
| C | — | price per piece |
| ZSper | — | average variable costs (per unit of output). |
| TBD | — | break-even point in monetary terms. |
| Tbn | — | break-even point in kind. |
The formula for calculating the break-even point in monetary terms:
(in rubles, dollars, etc.)
TBd = B * Zpost / (B - Zper)
The formula for calculating the break-even point in kind:
(in pieces, kilograms, meters, etc.)
Tbn = Zpost / (C - ZSper)
An example of calculating a break-even point
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The same data on the graph. Break-even point Тbn = 20 pieces
At the break-even point, the income line crosses and goes above the total cost line, the profit line crosses 0 - it moves from the loss zone to the profit zone.
How fixed costs, variable costs and price affect the break-even point, see.
At first glance, the formula for calculating the break-even point is quite simple, and there should be no difficulty in calculating it. But in reality, everything is not so simple.
Four important assumptions when calculating the break-even point
- We are talking about revenue (sales volume), so we believe that all for sale produced or purchased production... Stocks are not taken into account.
- Variable costs are directly proportional depend on the volume of sales. This is not always the case. For example, the case when a new workshop had to be built to increase the volume of production would have to be calculated in a more complicated way.
- Fixed costs are independent from sales. This also does not always happen. If to increase the volume of production it was necessary to build a new workshop, hire more management personnel, increase wages utilities- this case also does not fit the general formula.
- The break-even point is calculated for the enterprise as a whole or for some average product.
When calculating the break-even point, perhaps the most important constraint is assumption 4. To make the calculation for each product separately, you need to know how much of the fixed cost falls on each of the products. If there are many products, calculating break-even points separately for each product turns into a complex task that requires a lot of calculations.