Tutorial: The Breakeven Analysis

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Tutorial The Breakeven Analysis
Michael Bokor
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Order of the Slides

• Define Breakeven Analysis
• Theory behind it
• What it can be used for
• Breakeven formula
• Example
• Problem
• Conclusion
• Reference page

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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

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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

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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

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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

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

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An example of a Breakeven Analysis Report
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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

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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

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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

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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.

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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.
  

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Reference page

• A Framework for Management Gary Dessler
• http//www.tutor2u.net/business/production/break_e
  ven.htm 3/1/06
• http//connection.cwru.edu/mbac424/breakeven/Break
  Even.html 3/1/06
• http//www.dinkytown.net/java/BreakEven.html
  3/1/06
• http//office.microsoft.com/en-us/templates/TC0111
  65121033.aspx 3/1/06