Published on : 22 April 20202 min reading time
The break-even point of a project is the volume of activity necessary to cover your costs. It can be calculated in euros, in volume or otherwise depending on your type of operation. The break-even point is defined by the break-even point of the project: when the revenues are equal to the costs. Profits, on the other hand, are equal to zero. Calculating this break-even point is important for the definition of your strategy because it is the benchmark that allows you to know from when you will make profits.
Profit = Revenues – Costs
Revenues = Costs
Profits = 0
Fixed and variable charges
Your project expenses are divided into two categories: fixed and variable expenses. Fixed costs are by definition all costs that are fixed: they do not change according to the volume of activity. Variable costs increase with the volume of activity of the company.
Let’s take the example of a car manufacturer, Lamborghini while it’s at it The brand needs factories to produce its models and stores to sell them. The purchase or rental of these buildings and/or land is considered a fixed charge. Whether or not Lamborghini produces 1000 more cars in a year, the amount of these charges will remain fixed.
In order to assemble its cars Lamborghini needs tyres, steering wheels, seats, etc. All these parts are ordered from subcontractors according to the number of cars to be produced. So for 1000 more cars to be produced, Lamborghini will need 4×1000 more tires.
Neutral Point Calculation
Turnover is the product of the number of units sold and the unit selling price.
Thus, Revenues = P x N
with P the selling price and N the number of units sold
As for the charges, we can break them down as follows:
Costs = FC + VC x N
where FC is the sum of fixed costs, VC is the sum of unit variable costs and N is the number of units sold.
Thus, starting from the equation: Revenues = Costs, we get
P x N = FC + VC x N
P x N – VC x N = FC
N x (P-VC) = FC
N = FC /(P-VC)
By knowing the amount of his fixed costs (FC), the amount of variable costs per unit (VC) and the unit selling price of his good or service (P), it is easy to calculate N the break-even point of his project.