Break-Even Analysis.

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Presentation transcript:

Break-Even Analysis

What is Break Even Analysis & BEP? A technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output. The break-even point (BEP) is the quantity at which total revenue and total costs are equal. Profit comes from any units sold beyond the BEP.

Formula MUST Account for All Expenses The simple break-even formula discussed previously assumes total costs are equal to variable costs. In reality businesses have fixed and variable costs.

Costs Total costs: Fixed costs: Variable costs: Total expenses incurred by a firm in producing and marketing a product. Fixed costs: The firm’s expenses that are stable and do not change with the quantity of product produced. Variable costs: The sum of the expenses of a firm that vary directly with the quantity of products produced and sold.

How to Calculate BEP BEPQuantity = Fixed Cost Unit price – Unit Variable cost

Frame Shop BEP? BEPQuantity = $28,000 $100-30 = 400 pictures

Calculate Profit for the following Number of Picture Frames Sold: Quantity Sold Selling Price Total Revenue Unit Cost Total Variable Cost (TVC) Fixed Cost (FC) Total Cost (TC) Profit (TR-TC) O $100 $30 $28,000 -28,000 200 20,000 6,000 $34,000 -14,000 400 40,000 12,000 $40,000 600 60,000 18,000 $46,000 14,000 800 80,000 24,000 $52,000 28,000 1,000 100,000 30,000 $58,000 42,000 1,200 120,000 36,000 $64,000 56,000

Frame Shop BEP? Selling price of $75: BEPQuantity = $28,000 $75-30 Selling price of $75 = 622.2 pictures Selling price of $125: $125-30 = 294.7 pictures

Relationship Between Selling Price and BEP The higher the selling price the lower the BEP

Frame Shop BEP? Unit cost of $25: BEPQuantity = $28,000 $100-25 Selling price of $75 = 373.33 pictures Unit cost of $35: $100-35 = 430.7 pictures

Relationship Between Unit Cost and BEP The higher the unit cost the higher the BEP