How to calculate the threshold of profitability

The threshold of profitability is the amount of the revenue in this value, when is covering all costs completely when profit, which is equal to zero. It is also called break-even point. At this point, revenue can vary in size, which in turn affects the occurrence of loss or profit.

Instruction

1. 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.
2. 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.
3. 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).
4. 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.
5. 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.
6. 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.
7. 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.