What is Deadlock and how is it calculated?

In the road of a draft, there is a very important factor that is to demonstrate the ability of sales to absorb the costs that have been created. In that case we can define the Deadpoint, as the minimum amount of sales that the project has to achieve to begin acquiring certain benefits.

At this level, the sales volume fully covers the fixed costs of the period or the structure charges, adding costs that may vary depending on the volume. It's about a Point of economic balance highly important, because, from here, the difference between income and variable costs resembles benefits.

This is because the fixed costs have been fully covered, which means that from the standstill the level of benefits It has to coincide with the net profit and the company would have the guarantee of not losing in that year, even if it does not generate production nor does it have sales.

Neutral analysis

When a stalemate analysis, it is possible to start from two hypotheses that are totally fundamental:

• Prepared products can be sold in the perfectly competitive market, which means that the employer should not influence the value of the product, since it is defined by the market.
• The average variable cost of each product unit is constant, regardless of the production volume, which indicates that it will work through linear cost functions.

How to calculate the dead center?

The execution of neutral calculation corresponds to the model of direct costs in cost accounting. It is part of this model, because this method can classify both fixed and variable costs.

When making the decision to start a project or if you have had an established business for a long time, it is necessary to have constant knowledge of what is the deadlock or as it is also known, break-even point of the business.

The formula to be able to calculate the dead center is:

Q * p = CF + (CVu * Q)

Where:

• Q: It refers to the quantity that must be sold, it is the variable that must be known and calculated.
• Q: It is the sale price for each of the quantities.
• CF: They are the fixed costs that the business owns.
• CVu: They are the variable costs per unit that the business has.

If then you want to clear the Q, which is the indicator you want to find, you must transform the formula to the following:

Q = CF / p - Cvu

Fixed costs:

• They are all those costs that the business must bear, whether or not it is invoiced.

Variable costs:

• It refers to the relative costs that are directly related to the turnover of the business.

Separating the formula and isolating the Q, the minimum quantity of the product that has to be sold can be found or service and the corresponding price, so that it can cover all the costs generated by the business.

Obtaining this value would be the key to the initial phase when starting a project, since, in this way, the cost base of the project would be set. business and would have knowledge of the minimum billing amounts that must be had, to be able to know if the project is or not viable.

It is also very important to know what is the dead end of a business that has been running for a long time, because over time the fixed or variable costs may increase or decrease and then the minimum Q is different as well.

What are the limits of the deadlock.

Some of its limitations that must be taken into account are:

• Production and sales are not carried out in parallel. In the event that production is delayed, there would be unfavorable consequences for the stock level.
• The quantity of the products sold is not independent of their sale value.
• In situations of full capacity, variable costs could vary with a greater proportion than the increase in production.
• In order for the costs and variables to be classified, the period of time considered must be taken into account.
• If the amount of production is large, the fixed costs should not remain stable and can be increased.
• In some moments of production, the deadlock could change according to the type of customer, the distribution routes or the areas where it is distributed.
• If the historical data are not stable, conclusions that do not correspond could be drawn.
• Risks are not considered when making future forecasts.
• It is an analysis that can only be done in the short term.

Importance of the neutral calculation.

A cost control is essential within a company, that way you can know when the business begins to provide benefits. For this to be achieved, it is necessary to have a clear and simple knowledge of what the corresponding billing is so that the company obtains results that are profitable.

If an efficient billing program is in place, it can perform simple calculations from the When the benefits are presented, it can be said that it is the key tool for a good deal.

Once the company has been established, it is extremely important to know what is the deadlock of the activity. Knowing this point of the SME is also necessary, since it is possible to know the minimum level of production of the company and what it has to achieve in terms of income and costs.

If production is below neutral, revenue and costs will only provide losses to the company. company, otherwise, if production is above revenues and costs, large Benefits. There are many companies that do not know this information and risk adventure if implement deadlock, this can result in a level of loss and not reach the desired benefits.

What are the advantages of the deadlock

There are many sales but among the most important we can mention the following:

• You can determine the variation in profits from various changes in prices and costs.
• It allows a clear vision of the consequences generated by the increase in fixed costs.
• Provides information on all the risks that may arise in variations in the level of production.

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