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Original Title: Break Even Point Cost Analysis

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2404 Greensward N.

Warrington, Pa. 18976

W2gre@verizon.net

Date: April 15,2013

Simple Breakeven Point Mathematics

Executive Summary

The following article presents the mathematics required to calculate a

simple, breakeven point cost analysis for equipment replacement.

Detailed vs Simple

This article does not include Salvage Value, Depreciation, Loan Interest Rates,

Present Worth, Bond Funding or Tax Break mathematics. This is a treatise

concerning simple breakeven point cost analysis for equipment replacement.

A complete cost analysis can be a time consuming task and a waste of

personnel resources if initial assumptions are incorrect. A quick analysis should be

undertaken prior to a detailed examination of equipment replacement or

modification. Some of the data required to conduct a successful cost analysis

is knowing the price of the new equipment, yearly parts outlay, yearly maintenance

labor costs and the energy charges for the existing and new equipment. These expenses

can be either assumed, averaged from past experience or obtained from vendors

criteria.

Combinations

The first thing that should be considered is how many options will be compared.

Each competing option must be compared against every other alternative.

If more than two different options are available then an unordered arrangement

that consists of a subset of objects from a set without regard to order and which

repetitions are not allowed with distinct combinations of r objects out of n is:

( )

!

! !

n

n r r

n

r

(

=

(

(equation-1)

n

r

(

(

or

n

also written

n

r

C

r

c

William Greco Page-2 of 6

2404 Greensward N.

Warrington, Pa. 18976

W2gre@verizon.net

Date: April 15,2013

Combinations (Continued from page-1)

Example-1:

Assume that a total of (5) options are under consideration then:

( ) ( ) ( ) | |

! ! 5 4 3 2 1 120 120

10

! ! ! ! 5 2 ! 2 1 3 2 2 12

5

2

n n

n r r n r r

n

r

(

(

= = = = = = =

(

(

(

10 combinations will be required to be examined.

Another method follows:

Cancel all common factors =

( )

5 4 3 2 1 5 4 3 2 1

5 2 ! 2 1

=

( )

3 2 1

20

10

2

2 1

= =

Example-2:

In this example breakeven points for (4) options are being investigated.

Option-1 represents a complete equipment replacement, Option-2 portrays expenses

with no replacement of equipment, Option 3 denotes marginal modification of some

equipment and Option-4 signifies partial equipment replacement with a higher

initial cost than Option-3.

Table-1

Option Number Equipment

Replacement

Yearly Parts Expense Yearly Maintenance

Labor Expense

Yearly Energy Cost

1 $95,000 $500 $1,000 $3,500

2 0 $6,500 $9,000 $12,000

3 $15,000 $3,000 $4,500 $7,800

4 $22,500 $2,100 $3,800 $6,200

Number of option combinations to be compared:

( )

4 3 2 1 4 3 2 1

4 2 ! 2 1

=

( ) 2 2 1

12

6 combinations

2

= =

William Greco Page-3 of 6

2404 Greensward N.

Warrington, Pa. 18976

W2gre@verizon.net

Date: April 15,2013

Simple Breakeven Point Mathematics

Simple Breakeven Point (continued from page-2)

Example-2: (Continued from page-2)

Comparing option-1 against option-2: X represents the number of years that a

breakeven point is reached. The two equations are set equal to one another and

a solution is found for X.

95, 000 500 1, 000 3, 500 0 6, 500 9, 000 12, 000 X X X X X X + + + = + + +

Combining like terms: 5, 000 95, 000 27, 500 X X + =

Subtracting 27,500X from both sides:

| |

5, 000 27, 500 95, 000 27, 500 X X X + =

| |

27, 500X

| |

5, 000 27, 500 95, 000 0 X X + =

22, 500 95, 000 0 X + =

Subtract 95,000 from both sides:

22, 500 95, 000 95, 000 X + 0 = 95, 000

22, 500 95, 000 X

=

Divide each term by -22,500:

22, 500 X

22, 500

=

95, 000

22, 500

95, 000 38

4.22

22, 500 9

X YEARS = = =

After the 4.22 years in comparison with option-2, option-1 will be saving

6,500 + 9,000 + 12,000 5,000 = $22,500 per year

William Greco Page-4 of 6

2404 Greensward N.

Warrington, Pa. 18976

W2gre@verizon.net

Date: April 15,2013

Simple Breakeven Point Mathematics

Simple Breakeven Point (continued from page-3)

Example-2: (Continued from page-3)

Table-2 Results Example-2

Option Comparisons Breakeven Point (Years) Savings per year after Breakeven

point is reached

1 versus 2 4.22 $22,500 per year more than

option 2

1 versus 3 7.77 $10,300 per year more than

option 3

1 versus 4 10.21 $7,100 per year more than

option 4

2 versus 3 1.23 $12,200 per year more than

option 2

2 versus 4 1.46 $15,400 per year more than

option 2

3 versus 4 2.34 $3,200 per year more than

option 3

Example-3

A decision regarding the purchase of a new car is under consideration. Table-3 indicates the

assumed data with which the comparison will be made.

Table-3

Option Initial Expense Yearly insurance

Expenditure

Yearly

Maintenance

Expense

Yearly Fuel

Expenditure

Purchase

New Car

20,000 1000 100 2000 + 5% increase

each year

Keep Old

Car

0 600 500 + 150 increase

per year

4000 + 5% increase

each year

Note: the $2,000 and $4,000 fuel values are data fromthe previous year and are to be

increased by annual 5% compound each year.

William Greco Page-5 of 6

2404 Greensward N.

Warrington, Pa. 18976

W2gre@verizon.net

Date: April 15,2013

Simple Breakeven Point Mathematics

Example-3: (Continued from page-4)

The predicted yearly maintenance expense for the old car is $500 plus a $150 increase per year.

So the first year will cost $500, the second year will require $650 and by the 5

th

year maintenance

will be $1,100 per year. The total maintenance expense by the second year is $1,150,

third year = $1,950, fourth = $2,900 and by the fifth year a total of $4,000 will have been spent.

To derive the equation calculating the yearly maintenance expense for the old car,

the point slope method can be used.

The points are: (1,500) and (5,4000):

| |

| |

4000 500

5 1

m

=

3500

875

4

m = =

| | | |

500 875 1 y x =

500 875 875 y x =

500 500 875 875 500 875 375 y x x =

875 375 x can also be expressed as

2

425 75 x x + (equation-2)

Upon the premise that there will be a 5% fuel expense increase per year the following

equation can be used to work out the 5% fuel increase projections (this is a totaled

amount percentage compounded annually).

Total amount = | |

1 .05 P PX

x

+ + (equation-3)

Where: P = base data expense

x = number of years

r = percent increase per year

William Greco Page-6 of 6

2404 Greensward N.

Warrington, Pa. 18976

W2gre@verizon.net

Date: April 15,2013

Simple Breakeven Point Mathematics

Example-3: (Continued from page-5)

Substituting values for the total fuel increase equation-3 for the new car:

| |

2000 1 0.05 2000X

x

+ +

Substituting values for the total fuel increase equation-3 for the old car:

| |

4000 1 0.05 4000X

x

+ +

Applying the values from Table-3 the following equation is produced:

| || | | | | || | 20000 1000 100 2000 1 0.05 2000 600 875 375 4000 1 0.05 4000 x x x x x x

x x

( (

+ + + + + = + + + +

( (

Solving for X

7.372 Years x ~

The breakeven point for buying the new car is approximately 7.372 years.

Conclusion

As stated at the beginning of the article the calculations shown do not include

Salvage Value, Depreciation, Loan Interest Rates, Present Worth, Bond Funding

or Tax Break mathematics. The procedures indicated in this treatise should be

used only as a precursor to a detailed cost analysis or return on investment study.

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