1. Calculate Break Even Point
Principles of Cost Analysis and Management

2. Terminal Learning Objective
Action: Calculate Break Even Point
Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: With at least 80% accuracy (70% for international Learners):
Identify Assumptions Underlying Break Even Analysis
Identify Key Variables in Break Even Equation from Scenario
Conduct Problem Demonstration Exercises for Key Variable, Contribution Margin and Break Even Points.

3. What is Break Even? The Point at which Revenues = Costs
Revenues above the breakeven point result in profit
Revenues below the breakeven point result in loss
May be measured in units of output or revenue dollars
Represents a “Reality Check”
Is this level of revenue reasonable?
If not, what actions would yield a reasonable breakeven point?

4. Review Cost Terminology
Fixed Costs - Costs that do not change in total with the volume produced or sold
Variable Costs - Costs that change in direct proportion with the volume produced or sold
Mixed Costs - A combination of fixed and variable costs
Semi-variable Cost - Costs that change with volume produced, but not in direct proportion
Fixed Costs - Costs that do not change in total with the volume produced or sold
Variable Costs - Costs that change in direct proportion with the volume produced or sold
Mixed Costs - A combination of fixed and variable costs
Semi-variable Cost - Costs that change with volume produced, but not in direct proportion
Fixed Costs - Costs that do not change in total with the volume produced or sold
Variable Costs - Costs that change in direct proportion with the volume produced or sold
Mixed Costs - A combination of fixed and variable costs
Semi-variable Cost - Costs that change with volume produced, but not in direct proportion
Fixed Costs - Costs that do not change in total with the volume produced or sold
Variable Costs - Costs that change in direct proportion with the volume produced or sold
Mixed Costs - A combination of fixed and variable costs
Semi-variable Cost - Costs that change with volume produced, but not in direct proportion
Fixed Costs - Costs that do not change in total with the volume produced or sold
Variable Costs - Costs that change in direct proportion with the volume produced or sold
Mixed Costs - A combination of fixed and variable costs
Semi-variable Cost - Costs that change with volume produced, but not in direct proportion

5. Identify Assumptions
The following are implied in the simple breakeven equation:
A single product or service
Clearly segregated fixed and variable costs
Variable costs are linear on a per-unit basis
If analyzing multiple products is desired:
Use “$1 of Revenue” as the Unit -or-
Use a weighted average unit

6. LSA #1 Check on Learning
Q1. Why do we need assumptions? A1. Q2. How many products do we use in breakeven analysis? A2.
Q1. Why do we need assumptions?
A1. To simplify the analysis, following the Cost-Benefit and Materiality Constraints.
Q2. How many products do we use in breakeven analysis?
A2. Only one. Multiple products can overly complicate the analysis.
Facilitator’s Note: If time allowed, ask the following two questions.
1. Which type of cost remains the same in total when units produced or sold increases?
2. Which type of cost remains the same per unit when units produced or sold increases?

7. LSA #1 Summary
LSA #1 summary will be given upon completion of LSA#4.

8. The Breakeven Equation
Revenue – Costs = Profit
Revenue - Variable Cost - Fixed Cost = Profit
Breakeven Point is where Profit = 0
Revenue - Variable Cost - Fixed Cost = 0
Revenue = Variable Cost + Fixed Cost
Revenue = #Units Sold * Selling Price $/Unit
Variable Cost = #Units Sold * Variable Cost $/Unit
Revenue – Costs = Profit
Revenue - Variable Cost - Fixed Cost = Profit
Breakeven Point is where Profit = 0
Revenue - Variable Cost - Fixed Cost = 0
Revenue = Variable Cost + Fixed Cost
Revenue – Costs = Profit
Revenue - Variable Cost - Fixed Cost = Profit
Revenue – Costs = Profit

9. Graphic Depiction of Breakeven
Units Sold

10. Graphic Depiction of Breakeven (Cont.)
Units Sold

11. Graphic Depiction of Breakeven (Cont.)$
Units Sold

12. Graphic Depiction of Breakeven (Cont.)$
Units Sold

13. Graphic Depiction of Breakeven (Cont.)$
Units Sold

14. Graphic Depiction of Breakeven (Cont.)$
Units Sold

15. Graphic Depiction of Breakeven (Cont.)$
Units Sold

16. LSA #2 Check on Learning
Q1. How is the breakeven equation expressed? A1. Q2. Which variables are represented on the graph by upward sloping lines? A2.
Q1. How is the breakeven equation expressed?
A1. Revenue – Cost = Profit
Q2. Which variables are represented on the graph by upward sloping lines?
A2. Total Cost, Variable Cost and Revenue

17. LSA #2 Summary
LSA #2 summary will be given upon completion of LSA#4.

18. Sample Problem
The following costs are incurred per show at Sebastian’s Dinner Theater:
Facilities cost $500
Staff (actors who double as servers) 1000
Kitchen staff
Stage crew
Food cost (per ticket)
Ticket Price is $30
Task: Calculate Breakeven number of tickets.

19. Solving the Problem (part 1)
Identify the key variables in the equation
What are the fixed costs?
Facilities cost
Staff (actors who double as servers) 1000
Kitchen staff
Stage crew
Total
What are the variable costs?
$10 Food/Ticket * #Tickets
What is the revenue?
$30 Price/Ticket * #Tickets
Identify the key variables in the equation
What are the fixed costs?
Facilities cost
Staff (actors who double as servers) 1000
Kitchen staff
Stage crew
Total
What are the variable costs?
$10 Food/Ticket * #Tickets
What is the revenue?
$30 Price/Ticket * #Tickets
Identify the key variables in the equation
What are the fixed costs?
Facilities cost
Staff (actors who double as servers) 1000
Kitchen staff
Stage crew
Total
What are the variable costs?
$10 Food/Ticket * #Tickets
What is the revenue?
$30 Price/Ticket * #Tickets
Identify the key variables in the equation
What are the fixed costs?
Facilities cost
Staff (actors who double as servers) 1000
Kitchen staff
Stage crew
Total
What are the variable costs?
$10 Food/Ticket * #Tickets
What is the revenue?
$30 Price/Ticket * #Tickets

20. Define Contribution Margin
Contribution Margin = Sales – Variable Cost
Unit Contribution Margin Represents the dollar amount that each unit sold Contributes toward profit
Unit Contribution Margin =
Selling Price $/Unit – Variable Cost $/Unit
What is the Unit Contribution Margin for Sebastian’s Dinner Theater?
For every ticket sold, profit increases by:
$30 - $10 = $20
Contribution Margin = Sales – Variable Cost
Unit Contribution Margin Represents the dollar amount that each unit sold Contributes toward profit
Unit Contribution Margin =
Selling Price $/Unit – Variable Cost $/Unit
What is the Unit Contribution Margin for Sebastian’s Dinner Theater?
For every ticket sold, profit increases by:
$30 - $10 = $20
Contribution Margin = Sales – Variable Cost
Unit Contribution Margin Represents the dollar amount that each unit sold Contributes toward profit
Unit Contribution Margin =
Selling Price $/Unit – Variable Cost $/Unit
What is the Unit Contribution Margin for Sebastian’s Dinner Theater?
For every ticket sold, profit increases by:
$30 - $10 = $20
Contribution Margin = Sales – Variable Cost
Unit Contribution Margin Represents the dollar amount that each unit sold Contributes toward profit
Unit Contribution Margin =
Selling Price $/Unit – Variable Cost $/Unit
What is the Unit Contribution Margin for Sebastian’s Dinner Theater?
For every ticket sold, profit increases by:
$30 - $10 = $20

21. Define Contribution Margin (Cont.)
Contribution Margin may be stated as a Percentage:
Unit Contribution Margin/Unit Selling Price
Sebastian’s Contribution Margin Percentage =
$20/$30 =
$20/$30 = approximately .67 or 67%
For every $1 of sale, profit will increase by approximately $.67

22. Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
$20(#Tickets) = $2000
#Tickets = $2000/$20
#Tickets = 100
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
$20(#Tickets) = $2000
#Tickets = $2000/$20
#Tickets = 100
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
$20(#Tickets) = $2000
#Tickets = $2000/$20
#Tickets = 100
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
$20(#Tickets) = $2000
#Tickets = 2000/20
#Tickets = 100
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100
Revenue – Variable Cost – Fixed Cost = Profit Breakeven is the point where Profit = 0 $30(#Tickets) – $10(#Tickets) – $2000 = $0 (30-10)(#Tickets) – 2000 = 0 20(#Tickets) – 2000 = 0 20(#Tickets) = 2000 #Tickets = 2000/20 #Tickets = 100
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
20(#Tickets) – 2000 = 0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100

23. Graphic Solution $
Units Sold

24. $30(#Tickets) – $10(#Tickets) – $2000 = $0
Proving the Solution
Plug solution into the original equation:
$30(#Tickets) – $10(#Tickets) – $2000 = $0
$30(100) – $10(100) – $2000 = $0
$3000 – $1000 – $2000 = $0

25. LSA #3 Check on Learning
Q1. Is this quantity reasonable? A1. Q2. If not, why not? A2.
Since the purpose of breakeven analysis is feasibility, now that the breakeven number of tickets is known, we should ask ourselves questions about feasibility.
Q1. Is this quantity reasonable?
A1. Can we reasonably expect to sell this number of tickets?
Q2. If not, why not?
A2. The most critical reason “why not” is capacity.
Does the facility even hold 100 attendees?
Can we cook and serve food for 100 attendees?
Another reason to consider is demand. If there is not sufficient demand, is there anything we can do, such as advertising, to increase demand.

26. LSA #3 Check on Learning (Cont.)
Q3. Does the Unit Contribution Margin appear in the Breakeven Equation? A3. Q4. Using Sebastian’s Dinner theatre data how many tickets must be sold to yield a profit of $500 per show? A4. Q5. $1000 per show? A5.
Q3. Does the Unit Contribution Margin appear in the Breakeven Equation?
A3. Yes.
Contribution margin = Revenue – Variable Cost.
Breakeven Equation = Revenue – Variable Cost – Fixed Cost
Q4. How many tickets must be sold to yield a profit of $500 per show?
A4. Equation set up: Use the Breakeven equation, replacing “0” with the target profit number.
30(#Tickets) - 10(#Tickets) – 2000 = 500
Note: The solution to the equation follows.
(30-10)(#Tickets) – 2000 = 500
20(#Tickets) – 2000 = 500
20(#Tickets) = 2500
#Tickets = 2500/20
#Tickets = 125
Not surprisingly the additional number of tickets required above breakeven (100) is 25. Since the desired profit is 500 and the contribution margin is 20, profit will increase by 20 per ticket sold.
Q5. $1000 per show?
A5. 30(#Tickets) - 10(#Tickets) – 2000 = 1000
(30-10)(#Tickets) – 2000 = 1000
20(#Tickets) – 2000 = 1000
20(#Tickets) = 3000
#Tickets = 3000/20
#Tickets = 150

27. LSA #3 Summary
During this lesson, we studied and talked about; LSA #1 Identify Assumptions Underlying Break Even Analysis •We What is Break Even •Revenues / Cost •Fixed Rates / Variable Cost / Mixed Cost / Semi-variable Cost •Why we need Assumptions LSA #2 Identify Key Variables in Break Even Equation from Scenario •Scenarios utilizing Break Even equation LSA #3 Conduct Problem Demonstration Exercises for Key Variable, Contribution Margin and Break Even Points. •Conducted several sample exercises dealing with Contribution Margin and Break Even Points.

28. Using the Breakeven Worksheet
Enter Data from
Practical Exercises
in Spaces Provided
Use Tabs to Navigate

29. Using the Breakeven Worksheet (Cont.)
“Breakeven Point” Tab shows Graphic Solution and Proof Calculation

30. Using the Breakeven Worksheet (Cont.)
Blue Area indicates
Contribution Margin at
Various Quantities

31. Using the Breakeven Worksheet (Cont.)
“Cost” Tab Details Fixed Cost, Variable Cost, and Total Cost

32. Practical Exercise / Review

33. TLO Summary Action: Calculate Break Even Point
Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: With at least 80% accuracy (70% for international Learners):
Identify Assumptions Underlying Break Even Analysis
Identify Key Variables in Break Even Equation from Scenario
Conduct Problem Demonstration Exercises for Key Variable, Contribution Margin and Break Even Points.