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.

An example of a Breakeven Analysis Report

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) 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/mbac424/breakeven/BreakEven.html 3/1/06 http://www.dinkytown.net/java/BreakEven.html 3/1/06 http://office.microsoft.com/en-us/templates/TC011165121033.aspx 3/1/06