Transcript Tutorial: The break-even calculation

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]
An example of a Breakeven Analysis Report
Unit Contribution Margin
Amounts show n in U.S. dollars
Sales
Sales price per unit
Sales volume per period (units)
Total Sales
Variable costs per unit
Unit contribution margin
12.50
1,000
12,500.00
4.90 , 39%
Variable Costs
Commission per unit
Direct material per unit
Shipping per unit
Supplies per unit
Other variable costs per unit
Variable costs per unit
Total Variable Costs
2.00
2.50
1.10
0.80
1.20
7.60
Unit contribution margin
Gross Margin
4.90
7.60 , 61%
7,600.00
4,900.00
Variable Costs Per Unit
Fixed Costs Per Period
Administrative costs
Insurance
Property tax
Rent
Other fixed costs
Total Fixed Costs per period
1,200.00
500.00
150.00
800.00
750.00
1.20 , 16%
2.00 , 26%
Commission per unit
3,400.00
Direct material per unit
0.80 , 11%
Shipping per unit
Net Profit (Loss)
1,500.00
Supplies per unit
Other variable costs per unit
1.10 , 14%
2.50 , 33%
Results:
Breakeven Point (units):
Sales volume analysis:
Sales volume per period (units)
Sales price per unit
Fixed costs per period
Variable costs
Total costs
Total sales
Net profit (loss)
0
12.50
3,400.00
0.00
3,400.00
0.00
(3,400.00)
694
100
12.50
3,400.00
760.00
4,160.00
1,250.00
(2,910.00)
200
12.50
3,400.00
1,520.00
4,920.00
2,500.00
(2,420.00)
300
12.50
3,400.00
2,280.00
5,680.00
3,750.00
(1,930.00)
400
12.50
3,400.00
3,040.00
6,440.00
5,000.00
(1,440.00)
500
12.50
3,400.00
3,800.00
7,200.00
6,250.00
(950.00)
600
12.50
3,400.00
4,560.00
7,960.00
7,500.00
(460.00)
700
12.50
3,400.00
5,320.00
8,720.00
8,750.00
30.00
800
12.50
3,400.00
6,080.00
9,480.00
10,000.00
520.00
900
12.50
3,400.00
6,840.00
10,240.00
11,250.00
1,010.00
1,000
12.50
3,400.00
7,600.00
11,000.00
12,500.00
1,500.00
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
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,
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/enus/templates/TC011165121033.asp
x 3/1/06