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Module 13: Breakeven Analysis

SI-4251 Ekonomi Teknik


Muhamad Abduh, Ph.D.
Outline Module 13
 BEP
 Cost Volume Profit (CVP) Analysis
 Mixed Costs
 Element of Cost and Revenue
 Break-even Model
 Relevant Range...

2 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.


What is Break-Even Point Analysis?
 BEP analysis is one method used by business
executives to determine the number of units
or services that must be sold at a particular
price to cover all fixed and variable costs
related to that product or service. Until a
company has exceeded this point, they will
not be making any money…obviously not a
desirable outcome.

3 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.


Breakeven: A Measure of Production
Characteristic
 Any production capacity can be modeled in
terms of cost and revenue generating
characteristics.
 It is often questioned: “How many should one
produce in order to breakeven?”
 That question represents an inquiry on the
quantity (volume) of a production activity
that would make the cost of that production
equal to the return generated.
 In other word, breakeven point represents the
unit volume that balances the cost and the
revenue.
 Example:
 How many units should a store sell an item so that all of
4 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.
the cost can be recovered from the selling of those
Breakeven: A Measure of Production
Characteristic
 ( Production ) Capacity is the potential or maximum level of output of
production, that reflects the upper limit of achievable production.
 Capacity Factor is the ratio between the average output and the maximum
capacity
 Oave
CF =
 Cmax
 ( Physical ) Efficiency is defined as the ratio between the output and
input (in %tage)
 Due to loss Physical efficiency will always be < 100%, and in the course of
production the efficiency tends to increase up to a certain point when it
then turn to decrease.
 This phenomenon is regarded as to follow the “Law of Diminishing Return”
100%
efficiency

output
5 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.
Cost Volume Profit (CVP) Analysis
 Costs change in response to changes in
a cost driver
 Cost driver - any factor whose change
makes a difference in a related total
cost
 Volume (units or dollars) - most
prominent cost driver in cost-volume-
profit (CVP) analysis
 Cost behavior:
 Variable cost
 Fixed cost
6 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.
 Mixed cost
Mixed Costs

Variable

Fixed

7 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.


Element of Cost and Revenue
($)
income
revenue
Income
Cost

total cost (mixed cost)

variable cost

fixed cost

output
BEP ( unit )
8 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.
Break-even Model
($)

FC I = income
Income


N =
Cost

it
I − VC pr
o f
TC = total cost
of
ea
ar

VC = variable cost

ss
lo
of
ea
ar
FC = fixed cost

output
BEP ( unit )
9 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.
Non-linear Break-even Model
($) I = income TC = total cost
Income
Cost

VC = variable cost

FC = fixed cost

output
( unit )
BEP
10 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.
Comparing Two Alternatives
($)

I = income
Income
Cost

mixed cost - 2

mixed cost - 1

output
( unit )
BEP-1 BEP-2
11 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.
Relevant Range...
Relevant range is a band of volume in which a specific

relationship exists between cost and volume.


 Outside the relevant range, the cost either increases or
decreases.
 A fixed cost is fixed only within a given relevant range and a
given time span.
$160,000
stsoC dexiF


$120,000
– Relevant Range
$80,000

$40,000



0 5,000 10,000 15,000 20,000 25,000
Volume in Units
12 SI-4251 Ekonomi TeknikMuhamad Abduh, Ph.D.
Homework
John Doe is planning to start a business

venture in construction material supply.


He has calculated that he needs to spend
Rp28,5 millions for fixed expenses,
and additional cost of Rp350,000
for every unit sold.
 If he is expecting at least a profit of Rp
20,5 millions, how many units should
he sell the material @ Rp 250,000 a
unit?
 If he estimated to sell only 85% of that
numbers, how much should he set the
13 unit price in order to Ekonomi
SI-4251 secure profitAbduh,
TeknikMuhamad of Ph.D.
Rp

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