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Management
Break-even Point
Analysis
PowerPoint presentation to accompany
Heizer/Render
Principles of Operations Management, 7e
Operations Management, 9e
2008 Prentice Hall, Inc.
S7 1
Break-Even Analysis
Technique for evaluating process
and equipment alternatives
Objective is to find the point in
dollars and units at which cost
equals revenue
Requires estimation of fixed costs,
variable costs, and revenue
S7 2
Break-Even Analysis
Fixed costs are costs that continue
even if no units are produced
Depreciation, taxes, debt, mortgage
payments
S7 3
Break-Even Analysis
Assumptions
Costs and revenue are linear
functions
Generally not the case in the real
world
S7 4
Break-Even Analysis
900
800
Cost in dollars
700
500
400
Variable cost
300
100
co
t
i
of
r
P
600
200
Figure S7.6
Break-even point
Total cost = Total revenue
or
d
i
rr
ss or
o
L ri d
r
co
|
Fixed cost
|
100 200 300 400 500 600 700 800 900 1000 1100
Volume (units per period)
S7 5
Break-Even Analysis
BEPx =
breakeven point in units
BEP$ =
breakeven point in dollars
P
=
price
per unit (after all
discounts)
Break-even point
occurs when
TR = TC
or
Px = F + Vx
2008 Prentice Hall, Inc.
x=
number of
units produced
TR
=
total
revenue = Px
F=
fixed costs
V
=
variable cost per unit
TC
=
total
costs = F + Vx
F
BEPx =
P-V
S7 6
Break-Even Analysis
BEPx =
breakeven point in units
BEP$ =
breakeven point in dollars
P
=
price
per unit (after all
discounts)
BEP$ = BEPx P
=
=
=
2008 Prentice Hall, Inc.
F P
P-V
F
(P - V)/P
F
1 - V/P
x=
number of
units produced
TR
=
total
revenue = Px
F=
fixed costs
V
=
variable cost per unit
TC
=
total
costs = F + Vx
Profit = TR - TC
= Px - (F + Vx)
= Px - F - Vx
= (P - V)x - F
S7 7
Break-Even Example
Fixed costs = $10,000
Direct labor = $1.50/unit
Material = $.75/unit
Selling price = $4.00 per unit
$10,000
F
BEP$ =
=
1 - [(1.50 + .75)/(4.00)]
1 - (V/P)
S7 8
Break-Even Example
Fixed costs = $10,000
Direct labor = $1.50/unit
Material = $.75/unit
Selling price = $4.00 per unit
$10,000
F
BEP$ =
=
1 - [(1.50 + .75)/(4.00)]
1 - (V/P)
$10,000
=
= $22,857.14
.4375
$10,000
F
BEPx =
=
= 5,714
4.00 - (1.50 + .75)
P-V
S7 9
Break-Even Example
50,000
Revenue
40,000
Break-even
point
Dollars
30,000
Total
costs
20,000
10,000
Fixed costs
2,000
4,000
6,000
Units
8,000
10,000
S7 10
Break-Even Example
Multiproduct Case
BEP$ =
where
V
P
F
W
i
1-
Vi
Pi
x (Wi)
S7 11
Multiproduct Example
Fixed costs = $3,500 per month
Item
Sandwich
Soft drink
Baked potato
Tea
Salad bar
Price
$2.95
.80
1.55
.75
2.85
Cost
$1.25
.30
.47
.25
1.00
Annual Forecasted
Sales Units
7,000
7,000
5,000
5,000
3,000
S7 12
Multiproduct Example
Fixed costs = $3,500 per month
Annual Forecasted
Item
Price
Cost
Sales Units
Sandwich
$2.95
$1.25
7,000
Soft drink
.80
.30
7,000
Baked potato
1.55
.47 Annual 5,000 Weighted
Selling Variable .75
Forecasted 5,000
% of Contribution
Tea
.25
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $
Sales (col 5 x col 7)
Salad bar
2.85
1.00
3,000
Sandwich
Soft drink
Baked
potato
Tea
Salad bar
$2.95
.80
1.55
$1.25
.30
.47
.42
.38
.30
.58
.62
.70
$20,650
5,600
7,750
.446
.121
.167
.259
.075
.117
.75
2.85
.25
1.00
.33
.35
.67
.65
3,750
8,550
$46,300
.081
.185
1.000
.054
.120
.625
S7 13
BEP$ =
1-
Vi
Pi
x (Wi)
$3,500 x 12
= $67,200
.625
= 32.6 33 sandwiches
per day
S7 14