How to calculate the threshold of profitability

Can calculate the threshold of profitability by two ways: analytical or graphical. In turn, the analytical method of calculation of this indicator, you must use the following formula:the Threshold of profitability = total fixed costs / gross margin.

Define the value of the gross margin, if you have already calculated figure. To do this, use the formula: gross margin = revenue – variable costs size. Then calculate the gross margin, which is equal to gross margin divided by revenue.

Can use a formula to calculate the threshold of profitability, which is formed of all the above:the Threshold of profitability = total fixed costs*the revenue amount (revenue - sum of variable costs).

Find the value of the threshold of profitability with the help of graph. To do this, draw a graph. Then, on the OY axis, list the fixed costs. Then draw a line which shall be parallel to the x-axis and mark on it the fixed costs.

Determine on the x-axis point of sales. Next, select a point on this axis and for the selected amount of sales, calculate the value of the sum of fixed and variable costs. Then build a straight line, which should satisfy the established values.

Note at least one other point of sales on the x-axis. Then determine the revenue amount for the value. Then also build a straight line according to the obtained values.

Please note that on the chart the break-even point or threshold of profitability will be the point that you have turned by two intersecting lines built earlier. Properly constructed break-even chart can enable you to correlate the amounts of all expenditures and revenues from product sales.