BREAK-EVEN ANALYSIS

BREAK-EVEN ANALYSIS

 A tool for determining the capacity a facility must have to achieve profitability.
 Objective:
 To Find the point, in dollars and units, at which

COST = REVENUE
 The point is the break-even point.

 It requires an estimation of fixed costs, variable cost, and revenue.

BREAK-EVEN ANALYSIS

 Fixed Cost – are cost that continue even if no units are produced.
 Examples include depreciation, taxes, debt, and mortgage payments.
 Variable Cost - are those that vary with the volume of units produced.
 Major Components
1. Labor Costs
2. Materials Cost
BREAK-EVEN ANALYSIS

 The difference between selling price (P) and variable cost (V) is contribution
 Only when total contribution exceeds total fixed cost will there be profit.
 Revenue Function
 begins at the origin
 Proceeds upward to the right
 Increasing by the selling price of each unit.
ASSUMPTIONS

1. One product is involved

2. Everything produced can be sold
3. Variable cost per unit is the same regardless of volume
4. Fixed costs do not change with volume
5. Revenue per unit constant with volume
6. Revenue per unit exceeds variable cost per unit
ALGEBRAIC APPROACH
ALGEBRAIC APPROACH
ALGEBRAIC APROACH
SOLVING BEP: SINGLE PRODUCT CASE

 Stephens, Inc., wants to determine the minimum dollar volume and unit volume
needed at its new facility to break-even. The firm first determines that it has fixed
costs of $10,000 this period. Direct labor is $1.50 per unit, and material is $0.75 per
unit.The selling price is $4.00 per unit.

 If Stevens finds that fixed cost will increase to $12,000, what happens to the break-
even in units and dollars?
MULTIPRODUCT CASE
MULTIPRODUCT CASE
 Le Bistro also wants to know the break-even for the number of
sandwiches that must be sold every day.
PROBLEM NO. 1

 Marty McDonald has a business packaging software in Wisconsin. His

annual fixed cost is $10,000, direct labor is $3.50 per package, and
material is $4.50 per package. The selling price will be $12.50 per
package. What is the break-even point in dollars? What is break-even in
units?
PROBLEM NO. 2
 John has been asked to determine whether the $22.50 cost of tickets for the
community dinner will allow the group to achieve break-even and whether the 175
seating capacity is adequate. The cost for each performance of a 10-performance run
is $2,500. The facility rental cost for the entire 10 performances is $10,000. Drinks
and parking are extra charges and have their own price and variable costs, as shown
below:
Selling Price (P) Variable Cost (V) Estimated
Quantity of Sales
Units (sales)
Tickets with Dinner $22.50 $10.50 175
Drinks $5.00 $ 1.75 175
Parking $5.00 $ 2.00 100