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Lecture 27
Breakeven Analysis

Faculty of Mechanical Engineering

Ghulam Ishaq Khan Institute, Topi, Swabi
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4 Breakeven analysis is performed to determine

the value of a variable or parameter of a project
or alternative that makes two elements equal.
4 Example: The sales volume that will equate
revenues and costs.
4 BE analysis is commonly applied in make"or"
buy decisions.
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4 Breakeven point is established as a decision variable.

4 The variable may be design element to minimize cost,
or the production level needed to realize revenues that
exceed costs by 10%.
4 The breakeven point QBE is established using relations
for revenues and cost at different values of the variable
Q.
4 The size of Q may be expressed per year, percentage of
capacity, hours per month, and many other dimensions.
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4 Fixed costs (FC)

± Includes costs such as buildings, insurance,
fixed overhead, some minimum level of
labor, equipment capital recovery, and
information systems.
4 ariable costs ( C)
± Includes costs such as direct labor, materials,
indirect costs, contractors, marketing,
advertisement, and warranty.
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4 Fixed cost component is essentially constant for all

values of the variable, so it does not vary with
production level or workforce size.
4 Even if no units are produced, fixed costs are incurred
at some threshold level.
4 But the fixed costs can end if the plant shut down.
4 Fixed costs are reduced through improved equipment,
information systems, and workforce utilization, less
costly fringe benefit packages, subcontracting specific
functions and so on.
 



4 It changes with production level, workforce

size, and other parameters.
4 It is usually possible to decrease variable costs
through better product design, manufacturing
efficiency, improved quality and safety and
higher sales volume.
 


4
hen FC and C are added, they form the total cost

relation TC.
 

4 rofit = revenue ± total cost

= R " TC
4 If the variable cost per unit is reduced, the TC line has a smaller
slope, and the breakeven point will decrease. This is an advantage
because the smaller the value of QBE, the greater the profit for a
given amount of revenue.
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4 If nonlinear R or TC
models are used, there
may be more than one
breakeven point. The
maximum profit occurs
at Q between the two
breakeven points where
the distance between the
R and TC relation is
greatest.
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