What is the break-even point? How do you calculate?

When studying management accounting, which is used as an internal control of a company, the term break-even point is often used. What kind of “point” and how can it be used? This time, let’s learn about the break-even point as a whole.

table of contents

  • Break-even point = where zero profit is achieved!
  • Costs can be divided into two
    • What is a fixed cost?
    • What is variable cost?
  • What kind of calculation formula?
  • How to improve the break-even point
    • Reduce fixed costs
    • Reduce variable costs
  • What is the break-even point ratio?
  • Summary

Break-even point = where zero profit is achieved!

The basic purpose of accounting is to “calculate profits”. How much profit did you make in a given period (usually calculated in one year)? I want to calculate.
Profit is calculated by the following formula.

Profit = Sales-Cost

If the sales are 30 million yen and the cost is 25 million yen, the profit is 5 million yen. One purpose of a for-profit company is said to be to maximize this profit.

The break-even point is calculated to know the point at which this profit is calculated to be zero, that is, the amount of “sales = expense”. If the company makes sales that are perfect for the break-even point, the company is in a state where it has not made any losses but has not made any profits. In other words, it can be expressed as “If you have at least enough sales to reach the break-even point, you can maintain the status quo.”

Costs can be divided into two

There is something very important when calculating the break-even point. That is to classify costs. It is necessary to analyze the cost structure of a company by classifying costs into two types: fixed costs and variable costs.

What is a fixed cost?

Fixed costs are incurred only for a fixed amount regardless of the number of sales. Typical examples include rent of factories and offices, property tax on owned assets, personnel expenses related to management and operation departments, insurance premiums subscribed for welfare, interest paid on borrowings, etc. To do.
If you think about these costs, you’ll see that no matter how much the sales figures fluctuate, the amount doesn’t change. It’s unlikely that you’ll have to raise your rent because your sales were high this month.

What is variable cost?

Variable costs are those that increase or decrease according to the number of sales. Typical examples include product purchasing, raw material and processing costs for products, utility costs for machines operated to manufacture products, and artificial costs at construction and manufacturing sites.
It is natural that raw materials and processing costs are required to manufacture and sell a large number of products. The characteristic of variable costs is that they increase proportionally as sales increase in this way.

Is one cost actually a fixed cost? It is difficult to judge whether it is a variable cost. As a concrete example, labor costs are traditionally classified as fixed costs. However, in a situation where labor shortages are becoming apparent in all industries as in recent years, it is not uncommon to hire people temporarily or in the short term according to the on-site operating fees. In that sense, it also has the nature of variable costs.
Although it is difficult to classify, the following “break-even point calculation formula” can be obtained by dividing costs into fixed costs and variable costs.

 

Leave a Comment