How To Calculate The Threshold Of Profitability

Table of contents:

How To Calculate The Threshold Of Profitability
How To Calculate The Threshold Of Profitability
Video: How To Calculate The Threshold Of Profitability
Video: Constant profitability threshold 1 2023, February

The profitability threshold is the amount of revenue in such a value when all costs are fully covered with a profit that is equal to zero. It is also called the break-even point. It is at this point that the revenue can change in size, which in turn affects the occurrence of a loss or profit.

How to calculate the threshold of profitability
How to calculate the threshold of profitability


Step 1

You can calculate the threshold of profitability using two methods: analytical or graphical. In turn, in the analytical method for calculating this indicator, it is necessary to use the following formula: Profitability threshold = the value of fixed costs / gross margin ratio.

Step 2

Determine the value of the gross margin if you do not already have a calculated indicator. To do this, use the formula: gross margin = amount of revenue - size of variable costs. Then calculate the gross margin ratio, which is equal to the gross margin divided by the amount of revenue.

Step 3

You can use one complete formula to calculate the profitability threshold, which is formed from all of the above: Profitability threshold = the amount of fixed costs * the amount of revenue (revenue is the sum of variable costs).

Step 4

Find the threshold value using the graph. To do this, draw a graph. Then list the fixed costs on the OY axis. Then draw a line that should be parallel to the OX axis and mark the fixed costs on it.

Step 5

Locate the sales volume point on the OX-axis. 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 draw a straight line that should meet the set values.

Step 6

Mark for yourself one more point of realization volumes on the OX axis. Then determine the amount of revenue for this value. After that, also draw a straight line from the obtained values.

Step 7

Please note that on the chart, the break-even point or profitability threshold will be the point that you got when you intersect the two lines that were built earlier. A correctly constructed break-even schedule will be able to allow you to correlate all the amounts of expenses and income from product sales.

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