Breakeven Analysis A graphical view of the relationship between profit and sales volume By John C. Kelly

Steps to Perform Breakeven Analysis ► Select a sales unit, e.g.  Consultant: hours or projects  Writer: articles or books  Teacher: classes or students  Products: widgets ► Select a unit for analysis:  Time interval – month or year  Activity – class, magazine issue

Profit over some Time Interval Profit = Revenue – Expenses Revenue = Number of units sold X Price per unit Note Terminology Revenue = sales = gross income Profit = earnings = net income

Expenses = Fixed expenses + Variable expenses Fixed expenses occur even if you don’t sell any thing, e.g. rent, payroll, insurance = Fixed expenses + Variable expenses Fixed expenses occur even if you don’t sell any thing, e.g. rent, payroll, insurance

Variable Expenses Variable expenses are associated with the thing being sold, e.g. food in a restaurant, printing, manufacturing, sales commissions Can usually be thought of as Cost of Goods Sold On Income Statement = Number of Units Sold X Cost per Unit

Breakeven Analysis A graphical view of relationship between profit and sales volume Dollars Business Units Profit Loss Revenue Expenses Fixed Exp