Breakeven Analysis

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Breakeven Analysis

• Quantitative Tool for Evaluating Alternatives

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Breakeven Analysis

• Organizations face Variables Costs (VC).
• Variable Costs (VC) change with the volume of
  production, e.g. cost of materials or labor.
• Organizations face Fixed Costs (FC).
• Fixed Costs (FC) do not change with volume of
  production and would be incurred even if no
  products were manufactured or sold, e.g.
  Utilities, Advertising and Sales Expenses,
  Machinery.
• Price (P) per Unit is the revenue obtained per
  unit.
• Unit Contribution or Margin per Unit is the
  difference between price per unit and variable
  cost per unit, i.e.
• Unit Contribution P per unit VC per unit
• Breakeven volume is found by dividing the total
  fixed costs by the unit contribution
• Breakeven Volume (Units) Total Fixed Costs
• Unit Contribution

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Break Even Analysis

• Breakeven occurs when Total Costs Total
  Revenues
• Total Costs Fixed Costs Variable Costs
• If TC are greater than TR than loss is incurred.
• If TR are greater than TC than profit is
  incurred.
• Typically TR are less than TC at beginning stages
  of production
• Raising prices will reduce BEP.
• Lowering prices will increase BEP.

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