Fixed Costs and Break-Even Point

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The point of equality occurs when income equals expenses. The point is that all the funds received by the company were spent on paying expenses, and the profit is zero.

This point shows the minimum sales volume required to avoid losses. Anything above this point brings in profit, and anything below it brings in losses.

For example, a company sells children's overalls at a price ranging from 6,000 to 9,000 rubles per unit of goods, the average bill is 7,500 rubles.

Monthly expenses
Utility costs and rental costs 150,000
Amount of employee remuneration 150,000
Advertising 40,000
Other 20,000
Total: 260,000 rubles

Cost per unit of goods
Purchase of products 3700
Transportation 300
Piecework wages 1000
Total: 5000 rubles
TBU per unit of goods = sum of fixed costs / (price per unit of goods - sum of variable costs per 1 unit of goods)

260,000 / (7500 - 5000) = 104 units singapore email list of goods must be sold per month to break even.

TBU in money = price per unit of goods x TBU per unit of goods

7500 x 104 = 780,000 rubles is the minimum revenue to cover the company’s expenses.

Costs, both variable and fixed, are directly related to the volume of production. There is a point where the revenue from sales of products covers all costs, and this is called the critical point. This moment means that the enterprise has reached self-sufficiency.

Fixed Costs and Break-Even Point

Source: shutterstock.com

To forecast key indicators, it is necessary to determine:

what quantity of products should be produced and sold to achieve profitability;

find out the amount of production required to form a source of financial protection for the enterprise.

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Cost reduction strategy of the firm
Cost reduction stages:

Preparatory period . The organization must have an effective accounting and financial control system. Taking into account detailed and objective data on expenses, their level and factors influencing them, a financial plan, payment schedule, budgets, material procurement plan, etc. are created. Compliance with the approved data must be strictly controlled.

Determination of technical, economic and financial indicators in the current state from the moment of the decision to implement the cost reduction plan until the start of the actions. For example, this may include such values ​​as material consumption, electricity, cost price. This will allow you to evaluate the effectiveness of the measures taken.

Implementation of a strategic plan for economic transformations to optimize expenses. Each division develops its own program of actions to minimize costs, identifying opportunities to reduce expenses. This helps to increase financial discipline at all levels, and implement a system of personal responsibility.

Conducting calculations based on the performance indicators of measures aimed at reducing costs (for example, determining the amount of reduction in production or administrative costs).

Assessing the one-time costs associated with implementing a set of strategic measures. We examine the results of the projected impact of cost reduction and one-time costs of upgrades. For example, to reduce material costs, it may be necessary to create innovative tools, and to develop a new simplified design for product packaging, a series of experiments requiring investment.

We search for and eliminate possible contradictions . The changes made should not conflict with existing legislation, accounting standards, auditing, security systems. If necessary, we adjust internal rules and procedures (for example, the audit department is liquidated, and its functions are transferred to the accounting department).

We go through the procedure of coordinating the calculated indicators with financial experts, top managers of the company, heads of departments. The new strategy must be made publicly available to the organization's staff, and it is possible to organize internal training.

We control the implementation of a whole range of measures to reduce costs . We check compliance with task schedules, monitor indicators, organize on-site inspections, etc.

If necessary, we make adjustments to the cost reduction plan .

We calculate technical, economic and financial indicators "after" - based on the strategic events carried out. We compare the indicators "before" and "after", analyze and draw conclusions.

Cost reduction strategy of the firm