Break Even Analysis is pure Engineering Subject of great Interest

1. Tutorial:
The Breakeven Analysis
Michael Bokor

2. Order of the Slides
• Define Breakeven
Analysis
• Theory behind it
• What it can be used for
• Breakeven formula
• Example
• Problem
• Conclusion
• Reference page

3. 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

4. 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

5. 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

6. 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

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

8. 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.

9. Breakeven Analysis
[Name]
Amounts show n in U.S. dollars
Sales
Sales price per unit 12.50
Sales volume per period (units) 1,000
Total Sales 12,500.00
Variable Costs
Commission per unit 2.00
Direct material per unit 2.50
Shipping per unit 1.10
Supplies per unit 0.80
Other variable costs per unit 1.20
Variable costs per unit 7.60
Total Variable Costs 7,600.00
Unit contribution margin 4.90
Gross Margin 4,900.00
Fixed Costs Per Period
Administrative costs 1,200.00
Insurance 500.00
Property tax 150.00
Rent 800.00
Other fixed costs 750.00
Total Fixed Costs per period 3,400.00
Net Profit (Loss) 1,500.00
Results:
Breakeven Point (units): 694
Sales volume analysis:
Sales volume per period (units) 0 100 200 300 400 500 600 700 800 900 1,000
Sales price per unit 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50
Fixed 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 3,400.00
Variable 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 7,600.00
Total 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 11,000.00
Total 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 12,500.00
Net 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

10. Example
Lets say you own a business selling
burgers
It costs $1.00 to make one burger
That’s your V or Variable cost
You sell each burger for $2.80
That’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

11. 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

12. 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

13. 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.

14. 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,

15. Reference page
• A Framework for Management –
Gary Dessler
• http://www.tutor2u.net/business/pr
oduction/break_even.htm 3/1/06
• http://connection.cwru.edu/mbac4
24/breakeven/BreakEven.html
3/1/06
• http://www.dinkytown.net/java/Bre
akEven.html 3/1/06
• http://office.microsoft.com/en-
us/templates/TC011165121033.asp
x 3/1/06