Break-Even Point Analysis By Sheryl B. Satorre ----- TM 714 – Financial Management
Outline:• Definition• Basic Concepts 1/24/2013• What it can be used for?• BEP Formula Presented by: SB Satorre• BEP Chart• BEP Sample Problems• Limitations• Conclusion• References 2
Break-Even Point Analysis 1/24/2013A decision-making aid that enables amanager to determine whether a Presented by: SB Satorreparticular volume of sales will result inlosses or profits 3
Basic Concepts• Variable costs are costs that change with changes in production levels or sales. Examples 1/24/2013 include: Costs of materials used in the production of the goods Presented by: SB Satorre• Fixed costs remain roughly the same regardless of sales/output levels. Examples include: Rent, Insurance and Wages• Revenue is the total income received.• Profit is the money you have after subtracting 4 fixed and variable cost from revenue.
What it can be used for?• Monthly expenses- use it to see if your income is more then your expenses 1/24/2013• Determine minimum price product can be sold for Presented by: SB Satorre• Determine optimum price product can be sold for• Calculate effects of marketing programs on price 5
The Break-Even Point (BEP) Formula P(X) = F + V(X) 1/24/2013 Presented by: SB SatorreWhere: Revenue Total Costs • F = fixed costs • V = variable costs per unit • X = volume of output (in units) • P = price per unit 6
The Break-Even Point Formula (cont.)If we rearrange the formula where the breakeven is X then the 1/24/2013formula look like this X = F /( P – V) Presented by: SB Satorre Break-Event PointThis formula says that the breakeven point is where the numberof sales needed to make the cost equal to the revenue. 7
Break-Even Point Chart Presented by: SB Satorre 1/24/20138
Sample Problem # 1Lets say you own a business selling burgersIt costs Php 7.00 to make one burger 1/24/2013That’s your V or Variable cost! Presented by: SB SatorreYou sell each burger for Php 12.50.That’s your P or price per unit!Your cost for rent, utilities, overhead, etc... is Php 100,000 per month.Thats your F or fixed cost! 9
AnswerGiven: V = Php 7 P = Php 12.50 F = Php 100,000Solution: 1/24/2013 X = F /( P – V) Presented by: SB Satorre X = 100,000 / ( 12.50 - 7 ) X = 100,000 / ( 5.5 ) X = 18, 181.818 X ≈ 18, 182 To breakeven you would need to sell 18, 182 burgers. 10
Sample Problem # 2Try out this problem for your self 1/24/2013• You own a lemonade stand.• It costs you Php 1.50 to make cup of lemonade Presented by: SB Satorre• You sell your lemonade for Php 5.00.• It cost you Php 5,000 to rent for the space of your lemonade stand.• How many cups of lemonade do you have to sell to breakeven? Solve now 11
AnswerGiven: V = Php 1.50 P = Php 5.00 F = Php 5,000Solution: 1/24/2013 X = F /( P – V) Presented by: SB Satorre X = 5000 / ( 5 – 1.50) X = 5000/ ( 3.5) X = 1, 428.57 X ≈ 1, 429You would need to sell 1, 429 cups of lemonade to 12 breakeven.
Limitations of BEP Analysis• Assumes that sales prices are constant at all levels of output. 1/24/2013• Assumes production and sales are the same.• Break even charts may be time consuming to Presented by: SB Satorre prepare.• It can only apply to a single product or single mix of products. 13
Conclusion• A Breakeven Analysis is a simple tool to use to determine if you have priced your product 1/24/2013 correctly.• A Breakeven Analysis helps you calculate how Presented by: SB Satorre 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. 14
References:• Mejorada, Nenita D., Business Finance and Philippine Business Firms. 2006. 1/24/2013• A Framework for Management –Gary Dessler• Dessler, Gary, A Framework for Mabagement• Math Lover Hub Pages. Even Point Analysis. Presented by: SB Satorre http://mathslover.hubpages.com/hub/Breakeven-analysis• 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 15