What is the Point of Equilibrium?
The break-even point is the combination of key values that will show you the amount of monthly revenue sufficient to cover all your fixed and variable costs. It is a calculation to find out from what point the company manages to pay and goes on to make a profit.
When to use break-even?
Estimate the breakeven as accurately as possible is the best way to know if the business plan of the company to stand. In other words, you will find out exactly how much you need to sell each month (and at what price) to get the balance - or break even, in the English term.
How to calculate the Point of Equilibrium?
Before you begin, you need to determine some starting values, such as:
1. Unit price per sale: how much you charge for each product or service. Here, for example, we enter a value of $ 120 and we sell, in the month, 45 units.
2. Variable costs per unit: is all expense that is levied on the product or service. Below we determine the value of raw material costs, taxes, commissions and others. We arrive at a cost of $ 71,00 per unit.
3. Fixed costs by period: are those that have no relation to the production itself, but are necessary for the maintenance of the company. Wages, pro-labor, water, electricity and telephone are just a few examples.
How to interpret the Point of Equilibrium?
By adding variable costs to fixed costs and dividing by the final price of the product it is possible to determine the minimum number of minimum units to be sold. In the case of our example, it would be the approximate 54 (53,29) units. That is, in order for the operation to be in balance and not of that loss, it would have been necessary to have sold at least nine more units. From 55a the company of the example would be profitable.
Calculating the break-even point is a real management tool. It will give you an excellent idea of the costs involved in your business and the level of sales you will need to generate to cover your costs - which in turn could affect your entire business strategy.
Was the importance of this analysis clear? At LUZ, we offer a spreadsheet ready in Excel for to calculate the break-even point of your company!