Hi, let's say a company is thinking of investing in a new system to generate additional revenue and we'd like to calculate the breakeven point of this investment.
Do we use the overall profit of the company or the profit from the additional sales to calculate the breakeven of the investment?
Hi there,
You should take into account two things to calculate the breakeven:
So if the new system is going to have an impact on the rest of the company via synergies and cannibalization, you should also take that into account.
Best,
Francesco
They are evaluating the investment. So you consider all the revenues and costs that are specific to that investment, i.e., additional revenues and costs.
So no, do not consider revenues and costs that are not related to this investment.
Hello,
If you are trying to find out whether you will break even on a particular investment, you only need to consider the revenues and costs associated with that particular investment.
Hi,
That's a great question to ask the interviewer. What matters to the client is to know above what threshold/breakeven point (in terms of volume or pricing or whatever else) the new investment would be profitable. That helps them to understand if the investment is reasonable or not, if achieving profits sounds feasible.
It eventually comes down to the following question : “will the new investment impact the way the company currently operates or not ?”
If not, e.g. I open a new factory to manufacture one completely separate line of products, and there are no supply chain/sourcing/logistics/etc impact on my existing business, then I would assume that what matters is only the profitability on the increased revenue.
However if the new investments completely changes the way operations are conducted on the existing revenue then you would need to take that impact in consideration. For example, let's say you have a client that manufactures T-shirts today. They are trying to estimate whether opening a new factory would be worth it to manufacture jackets as well. If the new factory will effectively replace the old one which is closed down, then you need to estimate the impact on the full business.
Then of course once you get to your answer, try to take a step back and point out that what matters is not only the breakeven point on the new business, but also the profit margin as a % of revenue for example. Will the new business dilute my margins? How will shareholders take the news ? etc
I hope that's helpful, let me know if you'd like to go through a few cases like that, pleasure to help !
Best,
Mehdi
Hi there,
You need to measure only the additional revenue generated and compare that to the annual costs and investment cost.
Always remember to only use the numbers relevant to the investment itself :)
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Hi!
You should consider the additional profits arising from the investment.
Hope this helps.
Best,
Anto
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