break-even analysis

Intro to Management (tutorial 1) 1

Break-Even at Target Profit

Daniel Zhao

Intro to Management (tutorial 1) 2

Learning Objective

1. Marketing Terms2. Basic Calculations used in the

analysis of marketing problems

Intro to Management (tutorial 1) 3

Contribution

• The funds available to the seller of an item after subtracting the variable costs associated with it are referred to as contribution.

• Unit contribution: the contribution per each item sold.

• Contribution = Sales – Variable Costs

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Equations of Contribution Margin

• Contribution Margin (CM)– Sales Price - Variable Cost = CM per unit– Revenue - Total Variable Costs = CM in total

• Contribution Margin Ratio (CM%) Sales Price – Variable Cost

Sales Price

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Contribution : calculation example

• For example, we sell a unit of a product at a price of $100, and the variable manufacturing cost of that unit is $30; in addition, it costs us $3 for shipping and we paid 5% commission to salespeople.

• Total variable cost: $30 + $3 + $5 = $38

• Contribution: $100 – $38 = $62

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Break-Even

• Break-even(BE) means that our revenue is just enough to pay for both the variable and the fixed costs we have incurred, but only that. We have no profit, we have no losses; we have only broken even.

• BE = Total fixed costs ÷ unit contribution

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Break-Even: calculation example

• If the contribution is $62, and fixed costs are $100,000

• BE = $100,000 ÷ $62 = 1,613• The break-even point here is 1,613 units

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Profit Impact

• Unit × Units – FixedContribution Produced & Sold Costs

= Profit Impact• For example: $62 × $2,000 – 1,000 = $24,000• Why not just call it plain profit? …

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• Because… there may be a few other costs yet to be charged

against the product.• assume our target profit is $50,000, thus we add

an additional cost to fixed cost• Calculation: (Fixed + Profit + Additional ) ÷ Unit Contribution Cost Impact Fixed Cost = Req. Volume• ($100,000 + 24,000 + 50,000) ÷ $62 = 2806• this means we have to make and sell 2806 units to

yield the same profit

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Break-Even at Target Profit

Break-Even Point (Units) =

Fixed Costs + Target ProfitUnit Contribution

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Question

Sales Price/Unit $75Unit Variable Cost (45)Unit Contribution $30

Fixed Costs = $200,000Target Profit = $100,000

• What should be the Break-Even unit to achieve a target profit at $100,000?

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Answer:

Break-Even Units =

$200,000 + $100,000 $75 – $45

= 10,000 units

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Break-Even Chart

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When fixed costs decrease by $20,000, break-even decreases by 4,000 units ($200,000).

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B-E Calculation with Multiple Products

• For a company with more than one product, sales mix is the relative combination in which a company’s products are sold.

• Different products have different selling prices, cost structures, and contribution margins.

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B-E Calculation Example for Multiple Products

Description Selling

Price

Unit Variable

Cost

Unit Contribution

Margin

Number of

Boards Surfboards 500$ 300$ 200$ 500 Sailborads 1,000 450 550 300 Total sold 800

Description Number of Boards

% of Total

Surfboards 500 62.5% (500 ÷ 800)Sailborads 300 37.5% (300 ÷ 800)Total sold 800 100.0%

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Weighted-average

Description Contribution

Margin % of Total Weighted

Contribution Surfboards 200$ 62.5% 125.00$ Sailborads 550 37.5% 206.25 Weighted-average contribution margin 331.25$

$200 × 62.5%$200 × 62.5%

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Break-evenpoint =

Fixed Costs + Weighted-Average Unit Contribution Margin

$170,000 ÷ $ 331.25 = 514 units

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Questions?

End of the tutorial