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Terminal Learning Objective

• Action: Calculate breakeven point in units and


revenue

© Dale R. Geiger 2011 1


What is Breakeven?
• The Point at which Revenues = Costs
• Revenues above the breakeven point result in profit
• Revenues below the breakeven point result in loss
• May be measured in units of output or revenue
dollars
• Represents a “Reality Check”
• Is this level of revenue reasonable?
• If not, what actions would yield a reasonable
breakeven point?

© Dale R. Geiger 2011 2


Review: Cost Terminology
• Fixed Costs -Costs that do not change in total with the
volume produced or sold
• Costs that do not change in total with the volume
produced or sold
• Variable Costs - C- Costs that change in direct
proportion with the volume produced or sold
• osts that change in direct proportion with the volume
produced or sold
• A combination of fixed and variable costs
• Costs that change with volume produced, but not in
direct proportion
© Dale R. Geiger 2011 3
Check on Learning
• Why do we need assumptions?
• How many products do we use in breakeven
analysis?

© Dale R. Geiger 2011 4


The Breakeven Equation
Revenue – Costs = Profit

© Dale R. Geiger 2011 5


The Breakeven Equation
Revenue –Costs = Profit
Revenue - Variable Cost - Fixed Cost = Profit

© Dale R. Geiger 2011 6


The Breakeven Equation
Revenue –Costs = Profit
Revenue - Variable Cost - Fixed Cost = Profit
Breakeven Point is where Profit = 0
Revenue - Variable Cost - Fixed Cost = 0
Revenue = Variable Cost + Fixed Cost

© Dale R. Geiger 2011 7


The Breakeven Equation
Revenue –Costs = Profit
Revenue - Variable Cost - Fixed Cost = Profit
Breakeven Point is where Profit = 0
Revenue - Variable Cost - Fixed Cost = 0
Revenue = Variable Cost + Fixed Cost
Revenue = #Units Sold * Selling Price $/Unit
Variable Cost = #Units Sold * Variable Cost $/Unit

© Dale R. Geiger 2011 8


Graphic Depiction of Breakeven
$ 5000
4500
4000
3500
3000
2500
Revenue
2000
1500
1000
500
0
0 25 50 75 100 125 150

Units Sold
9
© Dale R. Geiger 2011
Graphic Depiction of Breakeven
$ 5000
4500
4000
3500
3000
2500 Variable Cost
2000 Revenue
1500
1000
500
0
0 25 50 75 100 125 150

Units Sold
10
© Dale R. Geiger 2011
Graphic Depiction of Breakeven
$ 5000
4500
4000
3500
3000
Fixed Cost
2500
Variable Cost
2000
Revenue
1500
1000
500
0
0 25 50 75 100 125 150

Units Sold
11
© Dale R. Geiger 2011
Graphic Depiction of Breakeven
$ 5000
4500
4000
3500
3000 Fixed Cost
2500 Variable Cost
2000 Total Cost
1500 Revenue

1000
500
0
0 25 50 75 100 125 150

Units Sold
12
© Dale R. Geiger 2011
Graphic Depiction of Breakeven
$ 5000
4500
4000
3500
3000 Fixed Cost
2500 Variable Cost
2000 Total Cost
1500 Revenue

1000
500
0
0 25 50 75 100 125 150

Units Sold
13
© Dale R. Geiger 2011
Graphic Depiction of Breakeven
$ 5000
4500
4000
3500
3000 Fixed Cost
2500 Variable Cost
2000 Total Cost
1500 Revenue

1000
500
0
0 25 50 75 100 125 150

Units Sold
14
© Dale R. Geiger 2011
Graphic Depiction of Breakeven
$ 5000
4500
4000
3500
3000 Fixed Cost
2500 Variable Cost
2000 Total Cost
1500 Revenue

1000
500
0
0 25 50 75 100 125 150

Units Sold
15
© Dale R. Geiger 2011
Check on Learning
• How is the breakeven equation expressed?
• Which variables are represented on the graph
by upward sloping lines?

© Dale R. Geiger 2011 16


Sample Problem
• The following costs are incurred per show at
Sebastian’s Dinner Theater:
• Facilities cost $500
• Staff (actors who double as servers) 1000
• Kitchen staff 200
• Stage crew 300
• Food cost (per ticket) 10
• Ticket Price is $30
• Task: Calculate Breakeven number of tickets.

© Dale R. Geiger 2011 17


Solving the Problem (part 1)
• Identify the key variables in the equation
• What are the fixed costs?
• Facilities cost 500
• Staff (actors who double as servers) 1000
• Kitchen staff 200
• Stage crew 300
• Total 2000
• What are the variable costs?
• $10 Food/Ticket * #Tickets
• What is the revenue?
• $30 Price/Ticket * #Tickets

© Dale R. Geiger 2011 18


Solving the Problem (part 1)
• Identify the key variables in the equation
• What are the fixed costs?
• Facilities cost 500
• Staff (actors who double as servers) 1000
• Kitchen staff 200
• Stage crew 300
• Total 2000
• What are the variable costs?
• $10 Food/Ticket * #Tickets
• What is the revenue?
• $30 Price/Ticket * #Tickets

© Dale R. Geiger 2011 19


Solving the Problem (part 1)
• Identify the key variables in the equation
• What are the fixed costs?
• Facilities cost 500
• Staff (actors who double as servers) 1000
• Kitchen staff 200
• Stage crew 300
• Total 2000
• What are the variable costs?
• $10 Food/Ticket * #Tickets
• What is the revenue?
• $30 Price/Ticket * #Tickets

© Dale R. Geiger 2011 20


Solving the Problem
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
(30-10)(#Tickets) – 2000 = 0
20(#Tickets) – 2000 = 0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100

© Dale R. Geiger 2011 21


Solving the Problem
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
20(#Tickets) – 2000 = 0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100

© Dale R. Geiger 2011 22


Solving the Problem
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100

© Dale R. Geiger 2011 23


Solving the Problem
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100

© Dale R. Geiger 2011 24


Solving the Problem
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100

© Dale R. Geiger 2011 25


Solving the Problem
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = 0
$20(#Tickets) = $2000
#Tickets = 2000/20
#Tickets = 100

© Dale R. Geiger 2011 26


Solving the Problem
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
$20(#Tickets) = $2000
#Tickets = $2000/$20
#Tickets = 100

© Dale R. Geiger 2011 27


Solving the Problem
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
$20(#Tickets) = $2000
#Tickets = $2000/$20
#Tickets = 100

© Dale R. Geiger 2011 28


Solving the Problem
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
$20(#Tickets) = $2000
#Tickets = $2000/$20
#Tickets = 100

© Dale R. Geiger 2011 29


Graphic Solution
5000
4500
4000
3500
$ 3000 Fixed Cost
2500 Variable Cost
2000 Total Cost
1500 Revenue

1000
500
0
0 25 50 75 100 125 150

Units Sold
30
© Dale R. Geiger 2011
Proving the Solution
• Plug solution into the original equation:

$30(#Tickets) – $10(#Tickets) – $2000 = $0


$30(100) – $10(100) – $2000 = $0
$3000 – $1000 – $2000 = $0

© Dale R. Geiger 2011 31


Critical Thinking Questions
• Is this quantity of tickets feasible?
• Why or why not?

© Dale R. Geiger 2011 32


Check on Learning
• Does the Unit Contribution Margin appear in the
Breakeven Equation?
• Using Sebastian’s Dinner theatre data how many tickets
must be sold to yield a profit of $500 per show?
• $1000 per show?
Sale Price = $30 / ticket Fixed Cost = $2,000
Variable Cost = $ 10 / ticket

© Dale R. Geiger 2011 33

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