The profitability threshold is What is the threshold of profitability? Formulas and calculation examples

To calculate the profitability threshold, apply:

• - mathematical method (equation method);
• - method marginal income(gross profit);
• - graphic method.

In accordance with this model, the mathematical relationship between profit, production volume and costs has the following form:

PR = pq - c - vq (1)

where PR - profit from product sales, monetary units; p is the selling price of a unit of production, monetary units; q - the number of sold units of production, natural units; c - total fixed costs, monetary units; v- variable costs per unit of output, monetary units.

Based on formula (1), it is easy to solve the main tasks of the break-even analysis: determining the break-even point; determination of production volumes to obtain target profit; determination of the price in the break-even analysis.

The break-even point is the sales volume of a product at which sales revenue covers total costs. At this point, revenue does not allow the organization to make a profit, but there are no losses either. Accordingly, according to expression (1), the formula for determining the break-even point (Qk) will take the following form:

Qk = c / (p - v) (2)

Break-even analysis allows you to determine the number of units of production Qpl, which must be produced and sold to obtain the planned profit PRpl.

Based on formula (1), the desired volume of production (Qpl) is calculated as:

Qpl \u003d (PRpl + c) / (p - v) (3)

Break-even analysis can also be used to make pricing decisions.

Based on formula (1)

(considering that at the breakeven point PR=0)

the minimum allowable unit price to cover total costs will be determined as follows:

Pmin \u003d (c + v q) / q (4)

Formula (4) serves as a starting point for calculating the price that needs to be set in order to obtain the planned profit (Ppl):

Ppl = (c + v q + PRpl) / q (5)

Consider the method of marginal income, which acts as an alternative to the mathematical method.

The marginal method includes profit and fixed costs. This method implies that the organization sells its product in such a way that the resulting marginal income can cover fixed costs and make a profit. The point when the marginal income received is able to cover fixed costs is called the equilibrium point.

In this case, the calculation formula looks like this:

P \u003d MD - Zpost,

Since at the equilibrium point the profit is 0, we transform the formula as follows:

MDed * OR = Zpost,

where OR is the volume of sales. Here OR is the threshold of profitability. The formula for calculating the threshold of profitability in this case is as follows:

PR \u003d Zpost / MDed,

In the case of making long-term decisions, it is necessary to calculate the ratios of marginal income and sales proceeds, i.e. you need to determine marginal income as a percentage of revenue.

For this, there is the following calculation:

(MD / VR) * 100%,

Therefore, by planning the revenue from product sales, you can set the expected marginal income.

It is also necessary to know that the above formulas remain correct only when making short-term decisions.

Secondly, the break-even analysis of production gives reliable results if the following conditions and relationships are met:

• - variable costs and sales revenue should have a linear dependence on the level of production;
• - labor productivity cannot change within the largest base;
• - specific variable costs and prices must remain constant during the entire planning period;
• - the structure of production cannot change during the entire planning period;
• - change of constants and variable costs can be measured accurately;
• - at the end of the analyzed period, the company does not leave stocks of finished products, i.e. the volume of sales corresponds to the volume of production.

Failure to comply with any of these conditions may result in erroneous results.

A business must necessarily pass the threshold of profitability and take into account that, following the period of increasing the mass of profits, a period will inevitably come when, in order to continue increasing output, a sharp increase will be necessary. fixed costs, as a result of which there will be a decrease in the received short term arrived.

The profitability of sales is determined by the ratio of profit from the sale of products or net profit to the amount of proceeds from the sale of products without VAT and excises, expressed as a percentage:

R = (P / BP) * 100%,

where - R - profitability in terms of turnover;

P - profit;

VR - proceeds from sales.

This indicator characterizes the effectiveness entrepreneurial activity: how much profit an economic entity has from the ruble of sales, work performed, services rendered.

Profitability of commodity output and certain types products is determined by the ratio of profit from the release of products or products of a certain type to the cost of commercial output of products:

Rtv \u003d (Pv / Stv) * 100%,

Rtv - profitability of commodity output and individual types of products;

Pv - profit from the release of products or products of a certain type;

Stv - the cost of commercial output.

This indicator characterizes the absolute amount or level of profit per ruble of funds spent.

The sources of information for the analysis of profitability indicators of products, works, services are form No. 2 financial statements, accounting registers of an economic entity.

Changes in the level of profitability of sales occur under the influence of changes in the structure products sold and changes in the profitability of certain types of products.

The profitability of certain types of products depends on:

• - on the level of sales prices;
• - on the level of production cost.

The analysis is carried out in the following sequence.

Determine the level of profitability of implementation according to the plan, actually for the reporting year, for the previous year. Then the object of analysis is determined: from the actual level of profitability for the reporting year, the planned level of profitability for the reporting year should be subtracted.

The following factors influenced the change in the level of profitability of sold products, works, services:

• 1. Changing the structure and range of products leads to an increase in the profitability of products sold. To do this, you need to define:
  • - profitability of sales for the previous year. The amount of profit is calculated based on the volume, structure, prices and cost of the previous year;
  • - profitability of sales, calculated with the amount of profit, which is determined based on the volume and structure of the reporting year, but the cost and price of the previous year.
• 2. Change in cost. To do this, it is necessary to determine profitability based on the cost of the reporting and previous years, i.e., the volume and structure of sales of the reporting year, the cost of the reporting year, and the prices of the previous year, i.e., it is necessary to exclude the effect of price changes.
• 3. Change in the price level. The level of profitability is determined with profit calculated with the volume, structure, cost and prices of the reporting year.

The analysis of the profitability of the output of certain types of products is carried out on the basis of the data of planned and reporting calculations. The level of profitability of certain types of products depends on the average selling prices and unit cost of production.

The calculation of the influence of these factors on the change in the level of profitability is carried out by the method of chain substitutions for each type of product.

To assess the dynamics of the levels of profitability of commercial output of certain types of products, it is necessary to compare the actual indicators of the reporting year by types of products with the actual indicators for a number of previous years, which will make it possible to determine the trend in the profitability of products, and, consequently, the phase life cycle products.

In conclusion, it is necessary to give overall score on the level of profitability of individual products.

The margin of financial strength shows how much it is possible to reduce the sale (production) of products without incurring losses. The excess of real production over the threshold of profitability is the margin of financial strength of the company:

ZFP = VR-PR,

where ZFP - margin of financial strength;

VR - proceeds from sales;

PR - the threshold of profitability.

The margin of financial strength of an enterprise is the most important indicator of the degree of financial stability. The calculation of this indicator makes it possible to assess the possibility of an additional reduction in revenue from sales of products within the break-even point.

In practice, there are three situations that will affect the amount of profit and the financial strength of the enterprise in different ways:

• 1. Sales volumes coincide with production volumes;
• 2. Sales volumes are less than production volumes;
• 3. Sales volumes are more than production volumes.

Both the profit and the margin of financial safety obtained with an excess of output are less than if sales volumes correspond to production volume. Therefore, an enterprise interested in improving both its financial stability and financial result, should strengthen control over production planning. In most cases, an increase in the inventory of an enterprise indicates an excess of production. An increase in stocks in terms of finished products directly testifies to its excess, indirectly - an increase in stocks of raw materials and starting materials, since the enterprise bears the costs for them already when they are purchased.

A sharp increase in inventories may indicate an increase in production in the near future, which should also be subjected to a rigorous economic justification.

Thus, if an increase in the company's reserves is detected in the reporting period, it can be concluded that it affects the value of the financial result and the level of financial stability. Therefore, in order to reliably measure the value of the financial safety margin, it is necessary to correct the sales proceeds by the amount of the increase in the company's inventory for the reporting period.

In the last version of the ratios - with a sales volume greater than the volume of production - the profit and the financial safety margin are greater than with the standard construction.

However, the fact of selling products that have not yet been produced, that is, in fact, does not exist yet in this moment, imposes on the enterprise additional obligations that must be met in the future. Exist internal factor, which reduces the actual value of the financial safety margin, is a hidden financial instability. A sign that an enterprise has hidden financial instability is a sharp change in the volume of stocks.

From the foregoing, it follows that in order to measure the financial strength of an enterprise, it is necessary to perform the following steps:

• 1. Calculate the stocks of financial strength;
• 2) Analyze the impact of the difference between sales volume and production volume through the correction of the value of the financial safety margin, taking into account the increase in the inventory of the enterprise;
• 3. Calculate the optimal increase in sales volume and financial safety margin limiter.

The margin of financial strength, calculated and adjusted, is an important comprehensive indicator of the financial stability of an enterprise, which must be used in predicting and ensuring the comprehensive financial stability of an enterprise.

The assessment of the financial safety margin is made according to the formula:

F \u003d ((VR - PR) / VR) * 100%,

where F is an indicator of assessing the margin of financial stability;

VR - proceeds from sales;

PR - the threshold of profitability.

Having a large margin of financial strength, the company can develop new markets, invest in securities and in the development of production.

Forecast profit calculations are important not only for the enterprises themselves and organizations that produce and sell products, but also for shareholders, investors, suppliers, creditors, banks associated with the activities of this entrepreneur, participating with their own funds in the formation of its authorized capital.

Therefore, planning the optimal size of profit in modern economic conditions is the most important factor in the successful entrepreneurial activity of enterprises and organizations.

The main indicator of the effectiveness of any type of entrepreneurial activity is profit, which can be predicted after calculating the profitability threshold.

The threshold of profitability is a relative indicator of the volume of proceeds from the sale of products, which covers all existing expenses without making a profit and without incurring losses. That is, financial activity is equal to zero, with the complex use of labor, monetary, and material resources. In most cases, it is expressed using interest, as well as per unit of funds invested in profit.

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How to calculate

In order to plan further profits and financial position, it is necessary to calculate the profitability threshold, which all companies strive to exceed. There are several calculation formulas that are expressed in monetary and natural terms, namely:

1. Profitability formula in monetary terms: PR d \u003d V * Z post / (V - Z lane). Where, PR d- threshold of profitability, V- revenue, Z post- fixed costs, determined by the volume of products produced, namely, transportation costs, the purchase of raw materials and materials, Z lane– variable costs, including rent, depreciation, utility bills and wages.
2. Profitability formula in in kind: PR n \u003d Z post / (C - ZS lane). Where, PR n- the threshold of profitability in pieces, C- product price, ZS lane are average variable costs.

An example of calculating the profitability threshold should be given on the basis of a certain enterprise "X", which sells 112 units. finished products, the price for one piece is 500 rubles. Variable costs for the production of one unit are 360 ​​rubles. Fixed costs per unit are 80 rubles, and fixed indirect costs are 36 rubles.

In order to proceed to the formula, it is necessary to determine the total number of variable and fixed costs.

They are calculated as follows:

Z post \u003d (80 + 36) * 112 \u003d 12992 rubles.

V \u003d 112 * 500 \u003d 56,000 rubles.

PR d \u003d 56000 * 12992 / (56000 - 40320),

PR d = 727552000/15680,

PR d \u003d 46400 rubles.

The resulting amount of the profitability threshold indicates that the company, after the sale of manufactured products, will begin to make a profit if it exceeds 46,400 rubles.

PR n \u003d 12992 / (500 - 360),
PR n = 12992/140,

PR n \u003d 92.8 pieces, after rounding it is 93 pieces.

The data obtained indicate that the company will begin to make a profit when the sales volume exceeds 93 pieces.

Threshold of profitability and margin of financial safety

Determining the profitability threshold allows you to plan future investments, for example, to minimize costs in the absence of demand, increase production, operate sustainably and create a certain financial reserve. And also constantly monitor the indicators of its position in the market and develop rapidly.

The margin of financial strength makes it possible to reduce the volume of production, provided that losses are not observed.

It can be determined by subtracting the profitability threshold indicator from the amount of revenue. The higher this indicator is, the more financially stable the company will be. In the event of a decrease in revenue below the profitability threshold, there will be a shortage of liquid funds and the company's financial position will deteriorate significantly.

Based on the indicator of the profitability threshold of the enterprise "X", it is possible to determine the margin of financial strength:

ZFP \u003d V-PR d,

ZPF \u003d 56000 - 46400,

ZPF \u003d 9600 rubles.

It follows from this that the enterprise, without serious losses, can withstand a decrease in revenue by 9600 rubles.

These two indicators are important not only for enterprises, but also for creditors, because on their basis the company can receive the necessary loan.

Profitability threshold

Profitability, in essence, is the profitability or profitability that an enterprise receives as a result of its work.

The main indicators of profitability include:

1. Profitability of the enterprise or balance sheet, is an indicator that shows the performance of an enterprise or industry as a whole.
2. Product profitability, is determined by the ratio of profit from sales to the cost of production or to full costs, and characterizes the result of current costs. It is calculated for all types of products, which allows you to evaluate the activity of production. To date, economists around the world determine the financial condition of enterprises using the profitability ratio, which shows the effectiveness of probable or planned investments.
3. Profitability of sales represents an indicator or coefficient of the share of profit in each earned monetary unit, and is also a certain indicator that affects the pricing policy. It is determined on the basis of the ratio of profit to revenue from the sale of all products.

Profitability Threshold Analysis

The threshold of profitability fully characterizes the work of the enterprise, rather than profit. It shows the overall ratio of resources used and those that are available. Its calculation is used both for evaluating the company's performance, and for future investments and pricing policy.

It should be noted that the profitability indicators of the enterprise, products and sales are calculated on the basis of net profit, proceeds from product sales, as well as balance sheet profit.

How to lower the threshold of profitability

The only way to achieve a lower profitability threshold is to increase the gross margin, that is, the marginal income, which is equal to fixed costs during critical sales volume.

In this case, it is necessary:

1. Increase sales volume.
2. Raise the price of products, but within effective demand.
3. Reduce variable costs, such as wages, rent, or utility bills.
4. Reduce fixed costs, which increase the threshold for profitability and reflect the degree of risk of entrepreneurial activity.

In order for the company to work and develop, it is necessary to correctly combine low fixed costs with a high gross margin. In this case, it is possible to calculate the profitability threshold by dividing the fixed costs by the gross margin ratio.

44. Determination of the threshold of profitability (break-even production).

Profitability threshold - This is such a proceeds from the sale, in which the company no longer has losses, but still does not have profits. The gross margin is exactly enough to cover fixed costs, and Pr is zero.

Profitability threshold (break-even point, critical point, critical volume of production (sales)) - this is the volume of sales of the company at which sales revenue fully covers all expenses for production and sales of products. To determine this point, regardless of the methodology used, it is first necessary to divide the forecasted costs into fixed and variable.

The practical benefit of the proposed division of costs into fixed and variable costs (the amount of mixed costs can be neglected or proportionally attributed to fixed and variable costs) is as follows:

First, it is possible to determine exactly the conditions for the termination of production by the firm (if the firm does not pay back the average variable costs, then it must stop producing).

Secondly, it is possible to solve the problem of profit maximization and rationalization of its dynamics under the given parameters of the firm due to the relative reduction of certain costs.

Thirdly, such a division of costs allows us to determine the minimum volume of production and sales of products, at which the business breaks even (profitability threshold), and show how much the actual volume of production exceeds this indicator (financial safety margin of the company) .

The profitability threshold is determined as the proceeds from the sale, in which the enterprise no longer has losses, but does not receive profit, i.e. the financial sr-in from the implementation after the reimbursement of variable costs is only enough to cover fixed costs and Pr is equal to zero.

Break-even point in physical terms for the production and sale of a specific product ( T b ) is determined by the ratio of all fixed costs for the production and sale of a particular product ( W fast ) to the difference between the price (revenue) ( C ) and variable costs per unit of product ( W beats per. ):

Break-even point in value terms is defined as the product of the critical volume of production in physical terms and the price of a unit of production.

The calculation of the profitability threshold is widely used in profit planning and determining the financial state of the enterprise. Two rules for entrepreneurs:

1. It is necessary to strive for a position where the proceeds exceed the profitability threshold, and to produce goods in kind in excess of their threshold value. This will increase the company's profits.

2. It should be remembered that the force of the influence of the pr-vennogo leverage is greater, the closer the pr-in to the threshold of profitability, and vice versa. This means that there is a certain limit of exceeding the profitability threshold, which must inevitably be followed by a jump in fixed costs (new labor resources, new premises, an increase in enterprise management costs).

The company must necessarily pass the threshold of profitability and take into account that after the period of increasing the mass of profits, there will inevitably come a period when, in order to continue production (increase in output), it will simply be necessary to sharply increase fixed costs, which will inevitably result in a reduction in profits received in the short term. .

When making a specific decision on the volume of production, the entrepreneur should take into account these conclusions.

Pr = Gross Margin - Fixed Costs = 0 or which is the same:

Pr = Threshold of profitability * gross margin in relative terms to revenue - constant. Cost=0

From the last formula, we obtain the value of the profitability threshold:

Threshold of profitability = Const. Costs / Gross margin in relative terms to revenue

In this regard, we note three most useful moments for the financier.

First. Having determined to what quantity of produced Goods the profitability threshold corresponds, at given selling prices, you get a threshold (critical) value of the production volume (in pieces, etc.). Below this amount, it is unprofitable for the enterprise to produce: it will cost “more expensive for itself”. The formulas commonly used are:

Here, however, there is a nuance. The threshold value of the volume of production, calculated by formula 1, coincides with that value calculated by formula 2, only when it comes to one single Te, which is “forced” by its sales revenue to cover all fixed costs of the enterprise, or when calculations are made for one isolated project. But if it is planned to produce several Commodities, then the calculation of the volume of production that ensures break-even, for example, Ta No. 1, is carried out most often according to a formula that takes into account the role of this Ta in the total sales proceeds and, thus, its share in fixed costs. Then instead of formula 2 use formula 3:

Second. Having passed the threshold of profitability, the company has an additional amount of gross margin for each next unit of Ta. Naturally, the mass of profits is also increasing.

To determine the amount of profit after passing the profitability threshold, it is enough to multiply the amount of Ta sold in excess of the threshold volume of production by the specific value of the gross margin “sitting” in each unit of sold Ta:

The third. As already noted, the strength of the impact of operating leverage is maximum near the profitability threshold and decreases as sales revenue and profit grow, since specific gravity fixed costs in their total amount decreases - and so on until the next “jump” of fixed costs.

The break-even point (profitability threshold) is such revenue (or the amount of production) that provides full coverage of all variable and semi-fixed costs at zero profit. Any change in revenue at this point results in a profit or loss.

To calculate the threshold of profitability, it is customary to divide the costs into two components:

· Variable costs - increase in proportion to the increase in the volume of production (sales of goods).

Fixed costs - do not depend on the quantity of products produced ( goods sold) and whether the volume of operations is growing or falling.

The value of the profitability threshold is of great interest to the lender, since he is interested in the question of the stability of the company and its ability to pay interest on the loan and principal. The stability of the enterprise determines the margin of financial strength - the degree of excess of sales over the threshold of profitability.

Let us introduce the notation:

The formula for calculating the profitability threshold in monetary terms:

PRd \u003d V * Zpost / (V - Zper)

The formula for calculating the profitability threshold in physical terms (in pieces of products or goods):

PRn \u003d Zpost / (C - ZSper)

The profitability threshold can be determined both graphically (see Fig. 1) and analytically.

With the graphical method, the break-even point (profitability threshold) is found as follows:

1. we find the value of fixed costs on the Y axis and draw a line of fixed costs on the graph, for which we draw a straight line parallel to the X axis;

2. select any point on the X axis, i.e. any value of sales volume, we calculate the value of total costs (fixed and variable) for this volume. We build a straight line on the graph corresponding to this value;

3. choose again any amount of sales on the x-axis and for it we find the amount of sales proceeds. We construct a straight line corresponding to this value.

The break-even point on the chart is the point of intersection of the straight lines built according to the value of total costs and gross revenue (Fig. 1). At the break-even point, the revenue received by the enterprise is equal to its total costs, while the profit is zero. The amount of profit or loss is shaded. If the company sells products less than the threshold sales volume, then it suffers losses; if more, it makes a profit.

Figure 1. Graphical definition of the break-even point (profitability threshold)

Margin Threshold = Fixed Costs / Gross Margin Ratio

You can calculate the profitability threshold of both the entire enterprise and individual types of products or services.

The company begins to make a profit when the actual revenue exceeds the threshold. The greater this excess, the more stock the financial strength of the enterprise and more the amount of profit.

How far the company is from the break-even point shows the margin of financial strength. This is the difference between the actual output and the output at the break-even point. Often calculated as a percentage of the margin of financial strength to the actual volume. This value shows by how many percent the volume of sales can decrease so that the company can avoid a loss.

Let us introduce the notation:

The formula for the margin of financial strength in monetary terms.

DEFINITION

Represents the revenue of the enterprise (the volume of products sold or manufactured), which will provide full coverage of fixed and variable costs for the implementation this production. In this case, the profit will be zero. The profitability threshold is often called the break-even point, the critical threshold for sales (sales).

The profitability threshold formula is of great importance in the implementation effective work enterprises. The value of the profitability threshold reflects the amount of products that need to be produced or sold to cover all costs. The threshold of profitability is the volume of goods or services at which the profit of the enterprise is zero and it does not incur losses.

The profitability threshold indicator is calculated from different positions:

• Reflects the state of the enterprise in which it does not make a profit, but can function;
• It defines the barrier, when passing through which the company will start to make a profit or go at a loss.

Profitability Threshold Formula

Any enterprise can determine the profitability threshold in two ways:

• In monetary terms (for example, in rubles),
• In physical terms (in pieces).

Profitability threshold formula in monetary expression looks like this:

Here PR is the threshold of profitability,

Vyr - the amount of revenue,

Zpost - the amount of fixed costs,

Zper - the sum of variable costs.

In physical terms, the profit margin formula looks like this:

PR \u003d Z post / (C - NW lane)

Here C is the price of a unit of production,

SZper - average variable costs for the production of each unit of output.

Graphical determination of the profitability threshold

Most often, along with the profitability threshold, a graphical method for determining it is used. The graphic image allows you to visually display the situation of growth in business efficiency or its decrease.

In order to build a graph, you need to do the following:

• Calculation of the profitability threshold for several volumes of sales (output),
• Mark all the points on the graph and connect them into a unifying curve.

Profitability threshold value

The profitability threshold formula is most often used in profit forecasting. financial condition companies.

Each entrepreneur must strive for a situation where revenue exceeds the profitability threshold, while in physical terms the amount of goods produced must exceed the threshold value. If these conditions are met, the company will be able to start increasing profits.

It is important to note that the impact of the production lever increases with the approach of production to the threshold of profitability, and vice versa. This means that there is a certain limit of exceeding the threshold of profitability, which will certainly be followed by a sharp increase in fixed costs (purchase of new labor tools, new premises, an increase in management costs).

Every new enterprise must necessarily pass the threshold of profitability, given that after the increase in the mass of profits, there will inevitably come a period of the need for a sharp increase in fixed costs. This will lead to a reduction in short-term profits.

Examples of problem solving

EXAMPLE 1