Profitability of side stream valorisation
Break-even-analysis tool
The decision to change towards more circular operations also includes considerations about the economic sustainability of this transition. Below you find a simple tool that you can use to conduct a break-even analysis for your new operations. You can do the break-even analysis either for the whole company or only for a single product or production line.
The break-even analysis consists of searching for the sold volume of an item that gives a zero result. To calculate the break-even point, we need to know the expected revenue, its variable costs (ie costs associated with sales volume) and its fixed costs (ie costs that are not driven by sales but are fixed regardless of production). When the total revenue is equal to the variable and fixed costs combined, the break-even point is reached. When the total revenue is less than the sum of the costs, the business makes a loss and correspondingly when the total revenue exceeds the sum of the costs, the business makes a profit.
Examples of variable costs are components in the product, energy consumption due to production of the product and so on. Fixed costs consist, for example, of premises rent, insurance, interest and other factors that are not determined by the scope of production. Personnel are also usually seen as a fixed cost because salary costs are a part of the business that is not affected by the fact that the business produces few or many of a product.
To visualize the zero point of the business, a result chart can be set up (see example below). The result diagram shows the business’s income and costs on the y-axis and the number of products on the x-axis. The zero point is indicated when the line representing costs intersects the line for revenues. The space between income and costs represents before the lines are crossed what loss the business makes in production of the item and after the lines are crossed what profit the business makes.
Click on the above image to view the break-even-analysis tool tutorial.
