Tutorial:

The Breakeven Analysis

Michael Bokor

Order of the Slides

• Define Breakeven Analysis

• Theory behind it• What it can be used for• Breakeven formula• Example• Problem• Conclusion• Reference page

What is a break-even analysis?

• Breakeven Analysis- A decision-making aid that enables a manager to determine whether a particular volume of sales will result in losses or profits

The theory behind the breakeven analysis

• Made up of four basic concepts– Fixed costs- costs that do

not change– Variable costs- costs that

rise in propitiation to sales– Revenue- the total income

received– Profit- the money you have

after subtracting fixed and variable cost from revenue

What can it be used for?

• Monthly expenses- use it to see if your income is more then your expenses

• Determine minimum price product can be sold for

• Determine optimum price product can be sold for

• Calculate effects of marketing programs on price

Breakeven formula

• P(X) = f + V(X)

• F = fixed costs

• V = variable costs per unit

• X = volume of output (in units)

• P = price per unit

This chart shows that the breakeven point is where the income and costs are equal

Breakeven formula cont.

• If we rearrange the where the breakeven is X then the formula look like this.

X = F /( P – V)

• This formula says that the breakeven point is where the number of sales needed to make the cost equal to the revenue.

Breakeven Analysis

[Name]Amounts show n in U.S. dollars

SalesSales price per unit 12.50Sales volume per period (units) 1,000 Total Sales 12,500.00

Variable CostsCommission per unit 2.00Direct material per unit 2.50Shipping per unit 1.10Supplies per unit 0.80Other variable costs per unit 1.20Variable costs per unit 7.60 Total Variable Costs 7,600.00

Unit contribution margin 4.90 Gross Margin 4,900.00

Fixed Costs Per PeriodAdministrative costs 1,200.00Insurance 500.00Property tax 150.00Rent 800.00Other fixed costs 750.00 Total Fixed Costs per period 3,400.00

Net Profit (Loss) 1,500.00

Results:Breakeven Point (units): 694Sales volume analysis:Sales volume per period (units) 0 100 200 300 400 500 600 700 800 900 1,000Sales price per unit 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50Fixed costs per period 3,400.00 3,400.00 3,400.00 3,400.00 3,400.00 3,400.00 3,400.00 3,400.00 3,400.00 3,400.00 3,400.00Variable costs 0.00 760.00 1,520.00 2,280.00 3,040.00 3,800.00 4,560.00 5,320.00 6,080.00 6,840.00 7,600.00Total costs 3,400.00 4,160.00 4,920.00 5,680.00 6,440.00 7,200.00 7,960.00 8,720.00 9,480.00 10,240.00 11,000.00Total sales 0.00 1,250.00 2,500.00 3,750.00 5,000.00 6,250.00 7,500.00 8,750.00 10,000.00 11,250.00 12,500.00Net profit (loss) (3,400.00) (2,910.00) (2,420.00) (1,930.00) (1,440.00) (950.00) (460.00) 30.00 520.00 1,010.00 1,500.00

Unit Contribution Margin

7.60 , 61%

4.90 , 39%

Variable costs per unit

Unit contribution margin

Variable Costs Per Unit

2.00 , 26%

2.50 , 33%

1.10 , 14%

0.80 , 11%

1.20 , 16%

Commission per unit

Direct material per unit

Shipping per unit

Supplies per unit

Other variable costs per unit

An example of a Breakeven Analysis Report

Example

Lets say you own a business selling burgers

It costs $1.00 to make one burgerThat’s your V or Variable cost

You sell each burger for $2.80That’s your P or price per unit

Your cost for rent, utilities, overhead, etc... is $100,000 per month

That's your F or fixed cost

Example cont.

V = $1.00 P = $2.80

F = $100,000

X = F /( P – V)

X = 100,000 / ( 2.80 - 1 )

X = 100,000 / ( 1.80 )

X = 55,555

To breakeven you would need to sell 55,555 burgers

Problem

Try out this problem for your self

• You own a lemonade stand• It costs you $0.05 to make cup of

lemonade• You sell your lemonade for $0.25• It cost you $50.00 to make the

stand • How many cups of lemonade do

you have to sell to breakeven?Solve now

Answer

X = F /( P – V)

X = 50 / ( .25 - .05 )

X = 50/ ( .20 )

X =250

You would need to sell 250 cups of lemonade to breakeven.

Conclusion

• A Breakeven Analysis is a simple tool to use to determine if you have priced your product correctly

• A Breakeven Analysis helps you calculate how much you need to sell before you begin to make a profit. You can also see how fixed costs, price, volume, and other factors affect your net profit.

Reference page

• A Framework for Management –Gary Dessler

• http://www.tutor2u.net/business/production/break_even.htm 3/1/06

• http://connection.cwru.edu/mbac424/breakeven/BreakEven.html 3/1/06

• http://www.dinkytown.net/java/BreakEven.html 3/1/06

• http://office.microsoft.com/en-us/templates/TC011165121033.aspx 3/1/06