Module 13: Breakeven Analysis

SI-4251 Ekonomi Teknik

Muhamad Abduh, Ph.D.
Outline Module 13
 BEP
 Cost Volume Profit (CVP) Analysis
 Mixed Costs
 Element of Cost and Revenue
 Break-even Model
 Relevant Range...

13-2 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.

What is Break-Even Point Analysis?
 BEP analysis is one method used by business executives
to determine the number of units or services that must
be sold at a particular price to cover all fixed and variable
costs related to that product or service. Until a company
has exceeded this point, they will not be making any
money…obviously not a desirable outcome.

13-3 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.

Breakeven: A Measure of Production
Characteristic
 Any production capacity can be modeled in terms of cost
and revenue generating characteristics.
 It is often questioned: “How many should one produce in
order to breakeven?”
 That question represents an inquiry on the quantity
(volume) of a production activity that would make the
cost of that production equal to the return generated.
 In other word, breakeven point represents the unit
volume that balances the cost and the revenue.
 Example:
 How many units should a store sell an item so that all of the cost can be
recovered from the selling of those products at a certain price?

13-4 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.

Breakeven: A Measure of Production
Characteristic
 (Production) Capacity is the potential or maximum level of output of production, that reflects the upper
limit of achievable production.
 Capacity Factor is the ratio between the average output and the maximum capacity
Oave
CF 
Cmax
 (Physical) Efficiency is defined as the ratio between the output and input (in %tage)
 Due to loss Physical efficiency will always be < 100%, and in the course of production the efficiency tends
to increase up to a certain point when it then turn to decrease.
 This phenomenon is regarded as to follow the “Law of Diminishing Return”

100%
efficiency

output
13-5 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Cost Volume Profit (CVP) Analysis
 Costs change in response to changes in a cost
driver
 Cost driver - any factor whose change makes a
difference in a related total cost
 Volume (units or dollars) - most prominent cost
driver in cost-volume-profit (CVP) analysis
 Cost behavior:
 Variable cost
 Fixed cost
 Mixed cost
13-6 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Mixed Costs
$4,500
$4,000
Sales Compensation

$3,500
$3,000 Variable
$2,500
$2,000
$1,500
$1,000 Fixed
$500
$0
$0 $10,000 $20,000 $30,000 $40,000

Total Sales
13-7 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Element of Cost and Revenue
($)

income
Income

revenue
Cost

total cost (mixed cost)

variable cost

fixed cost

output
BEP (unit)
13-8 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Break-even Model
($)

FC I = income
Income


N 
Cost

I  VC
TC = total cost

VC = variable cost

FC = fixed cost

output
BEP (unit)
13-9 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Non-linear Break-even Model
($) I = income TC = total cost
Income
Cost

VC = variable cost

FC = fixed cost

output
(unit)
BEP
13-10 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Comparing Two Alternatives
Income($)

I = income
Cost

mixed cost - 2

mixed cost - 1

output
(unit)
BEP-1 BEP-2
13-11 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Relevant Range...
Relevant range is a band of volume in which a specific relationship exists
between cost and volume.
 Outside the relevant range, the cost either increases or decreases.

 A fixed cost is fixed only within a given relevant range and a given time
span.

$160,000 –
Fixed Costs

$120,000 –
Relevant Range
$80,000 –

$40,000 –
–

–
0 5,000 10,000 15,000 20,000 25,000
Volume in Units
13-12 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Homework
John Doe is planning to start a business venture in
construction material supply. He has calculated that
he needs to spend Rp 28,5 millions for fixed
expenses, and additional cost of Rp 350,000
for every unit sold.
 If he is expecting at least a profit of Rp 20,5
millions, how many units should he sell the
material @ Rp 250,000 a unit?
 If he estimated to sell only 85% of that numbers,
how much should he set the unit price in order to
secure profit of Rp 10 millions?
13-13 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.