Break even analysis

Break-even analysis is a managerial method for decision

making.
A break-even analysis tells how many units of a product
(or service) must be sold, or how much revenue must be
generated, in order to break even.
The break-even point is defined as the point where a
companys total sales equal total costs.
Breaking even depends on these factors:
Fixed Costs
Variable Costs (per unit)
Selling price (per unit)
A Break-even analysis examines the interaction of fixed
costs, variable costs, price, and unit volume to help
determine interaction of these factors necessary to
break.
The analysis is also useful for showing a prospective
financing source that you are aware of how much money
you need to get your company going, or to keep it going.
Break even point
Q
FC
M (S, C, R)
VC
TC
S
VC = Q x v TC = FC + VC = FC + Q x v
S = Q x P S - FC - VC = 0
Break even point
Q = FC / (P - v)
Accounting break - even
Cash break - even
Financial break - even
Accounting break - even
0 project net income;
Evaluates projects Operating Cash Flow (OCF)
OCF is formed from depreciation of assets used in
the project
Q = (FC + OCF) / (P - v)
Cash break - even
Sales level resulting in a zero operating cash flow;
Q = FC / (P - v)
Financial break - even
Sales level resulting in a zero NPV (Net Present
Value);
Project costs = OCF x PVIFA
k
k
PVIFA
n

) 1 ( 1
Q = (FC + OCF) / (P - v)
CASES