The Breakeven Analysis

What is a break-even
analysis?
Breakeven Analysis- A
decision-making aid that
enables a manager to
determine whether a
particular volume of sales
will result in losses or
profits

The theory behind the breakeven

analysis
Made up of four basic
concepts
Fixed costs- costs that do
not change
Variable costs- costs that
rise in propitiation to sales
Revenue- the total income
received
Profit- the money you have
after subtracting fixed and
variable cost from revenue

What can it be used for?

Monthly expenses- use it
to see if your income is
more then your expenses
Determine minimum price
product can be sold for
Determine optimum price
product can be sold for
Calculate effects of
marketing programs on
price

Breakeven formula
P(X) = f + V(X)
F = fixed costs
V = variable costs per
unit
X = volume of output (in
units)
P = price per unit

This chart shows that the breakeven point is

where the income and costs are equal

Breakeven formula cont.

If we rearrange the where the
breakeven is X then the formula
look like this.

X = F /( P V)
This formula says that the
breakeven point is where the
number of sales needed to
make the cost equal to the
revenue.

Example
Lets say you own a business selling
burgers
It costs $1.00 to make one burger
Thats your V or Variable cost
You sell each burger for $2.80
Thats your P or price per unit
Your cost for rent, utilities,
overhead, etc... is $100,000 per
month
That's your F or fixed cost

Example cont.
V = $1.00 P = $2.80
F = $100,000
X = F /( P V)
X = 100,000 / ( 2.80 - 1 )
X = 100,000 / ( 1.80 )
X = 55,555
To breakeven you would
need to sell 55,555 burgers

Problem
Try out this problem for your self
You own a lemonade stand
It costs you $0.05 to make cup of
lemonade
You sell your lemonade for $0.25
It cost you $50.00 to make the
stand
How many cups of lemonade do
you have to sell to breakeven?
Solve now

Answer
X = F /( P V)
X = 50 / ( .25 - .05 )
X = 50/ ( .20 )
X =250
You would need to sell 250
cups of lemonade to
breakeven.

USES OF BREAK EVEVN POINT

Helpful in deciding the minimum quantity
of sales
Helpful in the determination of tender price
Helpful in examining effects upon
organizations profitability
Helpful in deciding about the substitution
of new plants
Helpful in sales price and quantity
Helpful in determining marginal cost

LIMITATIONS
Break-even analysis is only a supply side (costs only)
analysis, as it tells you nothing about what sales are
actually likely to be for the product at these various prices.
It assumes that fixed costs (FC) are constant
It assumes average variable costs are constant per unit of
output, at least in the range of likely quantities of sales.
It assumes that the quantity of goods produced is equal to
the quantity of goods sold (i.e., there is no change in the
quantity of goods held in inventory at the beginning of the
period and the quantity of goods held in inventory at the
end of the period.
In multi-product companies, it assumes that the relative
proportions of each product sold and produced are constant.

Conclusion
A Breakeven Analysis is a simple
tool to use to determine if you have
priced your product correctly
A Breakeven Analysis helps you
calculate how much you need to sell
before you begin to make a profit.
You can also see how fixed costs,
price, volume, and other factors
affect your net profit.