How do you compute the break-even point and the target profit point?


On the following figure, you can see a visual representation of the two key metrics we will compute in the next pages: the break-even point (in volume, \(Q_{be}\) and in revenues \(R_{be}\)) which is where the revenue line and the cost line intersect; and the volume (\(Q_{tp}\)) or revenue (\(R_{tp}\)) at target profit.

CVP graph

Figure 1: CVP graph

The break-even point is a first indication about operating risks associated with a cost structure: if it is very high, it means that the company will struggle achieving or maintaining a profit. As for the volumes and revenues at target profit, they are important benchmarks to continuously check whether the company progresses towards it goals.