The critical point of sales is also called a critical point, a threshold of profitability and, even, a “break even point”. This concept provides us with a lot of important information, since the critical point of sales shows:
- The sales volume for which income equals total costs, leading to a nil result;
- Also, the sales volume that allows a sufficient contribution margin to be obtained to cover fixed costs.
Formulas for calculating the critical sales point:
- Critical point of sales in quantity -> Q * = CF / mg (u)
- Critical point of sales in value -> V * = CF / (mg (u) / pv (u))
A company that produces and markets product A has fixed costs of € 5,000. The unit selling price is € 5 and the sum of unit costs is € 2.50. To calculate the critical point of sales in quantity and in value we would have to do the following:
Q * = 5,000 / (5-2.5) = 2,000 Units
V * = 5,000 / (2,5 / 5) = 10,000 €
These values mean that for the company to be able to cover all fixed costs it has to produce and sell 2,000 units of product A, the equivalent of € 10,000 of sales. Only from these values would the company be able to make a profit.