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The Breakeven Analysis

Order of the Slides
• Define Breakeven Analysis • Theory behind it • What it can be used for • Breakeven formula • Example • Problem • Conclusion • Reference page

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 .

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

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 • BEP = TFC / SP-VC • BEP= TFC/CM • TFC = TOTAL FIXED COST • SP= SELLING PRICE • VC= VARIABLE COST • CM= CONTRIBUTION MARGIN .

This chart shows that the breakeven point is where the income and costs are equal .

P = 0 since TR ‒ TC = 0 . at BEP.• • • • Profit = Total Revenues (TR) ‒ Total Cost (TC) P = (SP x Q) ‒ (FC + TVC) P = (SP x Q) ‒ (FC + VC x Q) Recall.

Cost Fixed Variable Land Machinery Insurance X X X TAXES Equipment rantal Raw Material Direct labor Overtime Freight X X X X X X .

If the firm’s target profit is RM 8. Determine the profit if the sales volume is 300 units. determine the profit if the sales volume is 700 units.Example: A firm is operating with a fixed cost of RM5. Find the break even point b.000 per month. a. . It sells its product at RM35 per unit. 000 per month and a variable cost of RM25 per unit. calculate the expected number of output or volume to be produced. d. c.

A local manufacturer. . PERMATA Sdn.000 units. The product can be sold for RM180 per unit and the estimated annual production for each location is 25. decides to relocate its existing obsolete plant. The company had done a study on several locations and finally came out with three alternatives.Bhd.

000 600.000 450.000 700.000 Bukit Rambai 180.000 Tangga Batu Labor Raw material Overhead Expenses Freight 30 25 28 17 Tanjung Kling 29 24 17 15 Bukit Rambai 28 26 30 16 .000 Tanjung Kling 250.000 700.000 600.000 550.Tangga Batu Utilities Building Equipment 120.

• Calculate the BEP for each location • How much each location has to produce to gain a profit of RM10. Which location should be selected ? .000 • Determine the profit for each location based on the expected annual production volume.

Example 3 • ELBA Company is considering whether to make or buy the electrical component that is needed for installation in order to complete the manufacture of ELBA refrigeratiors. The component can be bought from a local manufacturer at a price of RM48 / unit. . ELBA Company will incur a fixed cost of RM1. To manufacture the component.5 million and variable cost of RM18 per unit.

000 in profit.Bhd.30/botte. produces and sells tonic in the East Coast of Malaysia. • a) What is the breakeven quality ? • b) Show the total return for a monthly volume of 1000 bottles. . The tonic sells for RM1.000. They expect to move to the West Coast instead of the current location.• Labu-Labi Sdn.30 per bottle and material cost of RM0. The leading candidate’s location will have a monthly fixed cost of RM3. labor cost of RM0. • c) Determine the quantity that will give RM12.60/bottle.

En. Labor. A location in Puchong Perdana would have a fixed monthly costs of RM4.7. aretired government mechanic. Ahmad Spanner. His target customers would be most new-car dealers in the area and also car enthusiasts. Customer will be charged RM90 per car at either location. a) Which location would yield the greatest profit if monthly demand were ? i. Ahmad ? .000. materials and transportation costs would be RM30 per car. 200 cars ii. wants to open a ‘rustproofing’ business at either Sect 22 Shah Alam or Puchong Perdana. A location in Shah Alam would involve a fixed monthly costs of RM7.700 and labor materials and transportation costs of RM40 per car. 300 cars b) At what sales volume would the two locations in indifferent to En.

• Calculated and explain in the BEP • If the annual demand for the gadget is 55. what should ELBA do? .000 units.

00 to make one burger That’s your V or Variable cost You sell each burger for $2. overhead. is $100. utilities.80 That’s your P or price per unit Your cost for rent..000 per month That's your F or fixed cost .Example Lets say you own a business selling burgers It costs $1.. etc.

000 / ( 1.Example cont.1 ) X = 100. V = $1.00 P = $2.80 ) X = 55.555 burgers .555 To breakeven you would need to sell 55.000 X = F /( P – V) X = 100.80 .80 F = $100.000 / ( 2.

25 • It cost you $50.Problem Try out this problem for your self • You own a lemonade stand • It costs you $0.00 to make the stand • How many cups of lemonade do you have to sell to breakeven? Solve now .05 to make cup of lemonade • You sell your lemonade for $0.

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

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. . and other factors affect your net profit. price. volume.