Equilibrium Point Formula
In accounting, the break-even point is the level of activity in the volume of sales, in which the total income is considered equal to the total costs, being the point of activity where there are no losses or profits. In this article we will provide you the Equilibrium Point Formula.
Achieving the breakeven point is comparable to finding the number of units to be sold, always looking for sales to be equal to costs.
Equilibrium point formula and its variables
We can use two formulas to calculate the equilibrium point , these are:
Where:
This formula will give us a result in units , that is, it refers to the breakeven units, the quantity of the product that must be sold so that the income and costs are equal.
We can know the PE in monetary values by multiplying these units by the sale price.
Formula for calculating money values
The following formula can also be used to calculate the breakeven point in money or sales values :
Where:
- CVT refers to the total variable cost.
- VT to total sales.
Steps to find the equilibrium point
If you want to find and analyze a balance point, you must follow these steps:
1. Define costs
Defining costs is the first step, for this you must consider all disbursements as if they were costs, without leaving out the sales and administration expenses. Only financial expenses and taxes should be excluded.
2. Classify costs
When you have determined the costs to be used to break even, they should be classified as follows:
- Variable costs : are those that have variations depending on the changes in activity levels. They are related to the volume of production, number of units sold or services performed.
- Fixed costs : are those that are not affected by variations in sales activity such as insurance, depreciation or rents.
3. Find variable unit cost
This is obtained by dividing the number of units to be produced by the total variable costs. For this, the formula that we have mentioned above must be applied.
4. Check the results
When you have calculated the balance point it is necessary that you check your results, you must use the Income Statement.
5. Analyze the breakeven point
When you already have the balance point and you have checked it, you go on to analyze it. This is very useful to know how much you need to sell to achieve your financial goals, to break even, to determine profit from sales and also your own profit.
Aspects to consider
- When making use of a unit sale price you have to be sure that it is established in relation to the market analysis. Prices are determining factors when it comes to the customer’s decisions, who decides whether or not to buy a product.
- Propose pricing strategies that allow you to reach an acceptable and pre-established level of sale.
- You must maintain the equilibrium point as a reference of the minimum to sell so as not to have monetary losses. However, the sales target may be higher than the breakeven point.
