BREAK EVEN ANALYSIS

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.

Example
Lets say you own a business selling
burgers
It costs $1.00 to make one burger
Thats your V or Variable cost
You sell each burger for $2.80
Thats 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/mbac4
24/breakeven/BreakEven.html
3/1/06
http://www.dinkytown.net/java/Br
eakEven.html
3/1/06
http://office.microsoft.com/en-us
/templates/TC011165121033.aspx
3/1/06