Breakeven Ana

Break Even Analysis
Break Even Analysis
 Break even analysis refers to the determination of the

balanced performance level where project income is equal
to project expenditure.
 The break even point of an operation is defined as the
value of a given parameter that will result in neither profit
nor loss.
2/20/21 2
Breakeven Point Analysis
The Point at which Revenues = Costs

Revenues above the breakeven point result in profit
Revenues below the breakeven point result in loss
2/20/21 3
Breakeven Point Analysis
 Fixed Costs - Costs that do not change in total with the

volume produced or sold. EX: Buildings, Insurance , Fixed
overhead, Equipment Etc.
 Variable Costs - Costs that change in direct proportion
with the volume produced or sold. EX: Direct labor (wages),
Materials, Indirect costs (e.g., fringe benefits), Marketing,
Advertising ,Warranty Etc.
2/20/21 4
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 5
© Dale R. Geiger 2011
$ 5000
4500
4000
3500
3000
2500 Column2
2000 Revenue
1500
1000
500
0
0 25 50 75 100 125 150
Units Sold 6
$ 5000
4500
4000
3500
3000
Fixed Cost
2500
Column1
2000 Revenue
1500
1000
500
0
0 25 50 75 100 125 150
Units Sold 7
$ 5000
4500
4000
3500
3000 Fixed Cost
2500 Variable Cost
2000 Total Cost
Revenue
1500
1000
500
0
0 25 50 75 100 125 150
Units Sold 8
$ 5000
4500
4000
3500
3000 Fixed Cost
2500 Variable Cost
2000 Total Cost
Revenue
1500
1000
500
0
0 25 50 75 100 125 150
Units Sold 9
$ 5000
4500
4000
3500
3000 Fixed Cost
2500 Variable Cost
Total Cost
2000
Revenue
1500
1000
500
0
0 25 50 75 100 125 150
Units Sold 10
$ 5000
4500
4000
3500
3000 Fixed Cost
2500 Variable Cost
Total Cost
2000
Revenue
1500
1000
500
0
0 25 50 75 100 125 150
Units Sold 11
Linear cost relationship
Total costs
Cost
Variable
costs
Fixed costs (level)
Level of activity
2/20/21 12
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
2/20/21 13
The Breakeven Equation
Total cost = fixed costs + variable costs (quantity):

TC  FC   VC * Q
Revenue = selling price *(quantity)
R   SP  * Q
Profit = Revenue - total cost
Break-even point is where total costs = revenue:
TC  R or F   VC Q   SP  Q
FC
or Q 
2/20/21 SP  VC 14
Sample Problem
 The following costs are incurred per show at Sebastian’s
Theater Hall:
 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 the Breakeven number of tickets.
2/20/21 15
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 $10 Food/Ticket * #Tickets
 What is the revenue?
$30 Price/Ticket * #Tickets
 $30 Price/Ticket * #Tickets
2/20/21 16
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
2/20/21 17
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
20(#Tickets) – 2000 = 0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100
2/20/21 18
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0#Tickets = 2000/20

#Tickets = 100
2/20/21 19
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
#Tickets = $2000/$20
#Tickets = 100
#Tickets
20(#Tickets) = 2000
2/20/21 #Tickets = 2000/#Tickets = 100 20
Graphic Solution
Units Sold
21
Example
 A road can be paved with either asphalt or concrete.
Concrete costs $15,000/km and lasts 20 years. What is
the maximum that should be spent on asphalt if it only
lasts 10 years? Annual maintenance costs for both
pavements are $500/km. MARR = 12%.
2/20/21 22
Example Solved
 Break-even point:
15,000(A/P, 12%, 20) = PASPHALT(A/P, 12%, 10)
15,000(.1339) = PASPHALT(.1770)
PASPHALT = $11,347
2/20/21 23
EXAMPLE
 A proposed building may be roofed in either galvanized steel
sheet or composition roofing. The composition roof costs
$20,000 and must be replaced every 5 years at the same cost.
The steel roof costs $28,000 but the useful life is unknown.
Neither roof has any salvage value and no maintenance is
needed. If the minimum attractive rate of return (MARR)
equals 15%, what is the minimum life that the steel roof must
have to make it the better alternative?
2/20/21 24
Solution
EACS = EACC
28,000(A/P, 15%, n) = 20,000(A/P, 15%, 5)
28,000(A/P, 15%, n) = 5,966

(A/P, 15%, n) = .2131
(A/P, 15%, 8) = .2229
(A/P, 15%, 9) = .2096 → n = 9
2/20/21 25
Comparing different alternatives By
Break-even point
1. Define the common variable and its
dimensional units.
2. Use AW or PW analysis to express the
total cost of each alternative as a
function of the common variable.
3. Equate the two relations and solve for
the breakeven value of the variable.
4. If the anticipated level is below the breakeven value, select the

alternative with the higher variable cost (larger slope). If the level
is above the breakeven point, select the alternative with the lower
variable cost.
2/20/21 26
Example
 A Yellow Pages directory company must decide whether it should compose
the ads for its clients in house or pay a production company to compose
them. To develop the ads in house, the company will have to purchase
computers, printers, and other peripheral at a cost of $12,000. The
equipment will have a useful life of 3 years, after which it will be sold for
$2000. The employee who creates the ads will be paid $45,000 per year.
In addition, each ad will have an average cost of $8 to prepare for delivery
to the printer. A total of 4000 ads are anticipated for the next few years.
Alternatively, the company can outsource ad development at a fee of $20
per ad regardless of the quantity. The current interest rate is 8% per year.
What is the breakeven amount, and which alternative is economically
better?
2/20/21 27
Solution
Let x = ads per year
-12,000(A/P,8%,3) – 45,000 + 2000(A/F,8%,3) –8x = -20x

-12,000(0.38803) – 45,000 + 2000(0.30803) = -12x
-49,040 = -12x
x = 4087 ads per year breakeven .xlsx

 At 4000 ads per year, select the outsource option at $20
per ad for a total cost of $80,000 versus the in house
option cost of $49,040+8(4000) = $81,040. Solver.xlsx
2/20/21 28
Example
 Machine A has a fixed cost of $40,000 per year and a

variable cost of $60 per unit. Machine B has an unknown
fixed cost, but with this process 200 units can be
produced each month at a total variable cost of $2000. If
the total costs of the two machines break even at a
production rate of 2000 units per year, what is the fixed
cost of machine B?
2/20/21 29
Solution
Let FCB = fixed cost for B. Set total cost relations equal at
2000 units per year.
Variable cost for B = 2000/200 = $10/unit
40,000 + 60(2000 units) = FCB + 10(2000 units)
FCB = $140,000 per year
2/20/21 30
Example
Work sheet on Chapter one.docx
Solver.xlsx
2/20/21 31
Summary
 The breakeven point for a problem can be
expressed as:
 Units per time period
 Hours per month
 Price per unit
 Etc.
2/20/21 32
Summary
 Revenue and cost can be:
 Linear, or
 Non-linear
 Breakeven analysis is a form of sensitivity
analysis
2/20/21 33
Benefit-Cost Ratio Analysis
2/20/21 34
Objective
 Public sector
 B/C for single project
 Alternative selection
 Multiple Alternative
2/20/21 35
Public Project
Unit
Citizen of the government
StateCountry
province
Nation
2/20/21 36
Public Project
 Reducing the effects of politics and special interests.
 Performed correctly, the benefit/cost method will always
select the same alternative as PW, AW, and ROR analyses.
 provide services to the citizenry for the public good at no
profit.
2/20/21 37
Public Project
 Hospitals and clinics  Transportation: highways, bridge
 Parks and recreation waterways
 Utilities: water, electricity, gas,
 Police and fire protection
sewer, sanitation  Courts and prisons
 Schools: primary, secondary,  Food stamp and rent relief
community colleges, universities programs
 Economic development  Job training
 Convention centers  Public housing
 Sports arenas  Emergency relief
 Codes and standards
2/20/21 38
Private vs Public Sector
Characteristic Public sector Private sector
Size of investment Large More medium to small
Life estimate Longer (30-50 +) Shorter (2-25)
Annual cash flow No profit: cost, benefit, dis benefit Revenues contributed to
estimate are estimated profit: costs are estimated
Stocks, bonds, loans,

Funding Taxes, fees, bonds, private funds
individual owners
Higher, based on market cost

Interest rate Lower
of capital
Alternative selection Primarily based on rate of

Multiple criteria
criteria return
Environment of the Primarily economic

evaluation Politically inclined
2/20/21 39

individual owners

Interest rate Lower
of capital

Multiple criteria
criteria return

2/20/21 40

individual owners

Interest rate Lower
of capital

Multiple criteria
criteria return

2/20/21 41

individual owners

Interest rate Lower
of capital

Multiple criteria
criteria return

2/20/21 42

individual owners

Interest rate Lower
of capital

Multiple criteria
criteria return

2/20/21 43

individual owners
Higher, based on market

Interest rate Lower
cost of capital

Multiple criteria
criteria return

2/20/21 44

individual owners

Interest rate Lower
of capital

Multiple criteria
criteria return

2/20/21 45

individual owners

Interest rate Lower
of capital

Multiple criteria
criteria return

2/20/21 46

individual owners

Interest rate Lower
of capital

Multiple criteria
criteria return

2/20/21 47
Public – Private partnership
 Greater efficiency of the private sector and in part because of
the sizable cost to design, construct, and operate such
projects.
 Full funding by the government unit may not be possible
using traditional means of government financing-fees, taxes,
and bonds.
2/20/21 48
Public – Private partnership
 Contracted under Build operate and Transfer (BoT)
 Contractor : design and financing, and responsible for the
construction (the build element), operation (operate), and
maintenance activities for a specified number of years.
2/20/21 49
Benefit/cost analysis of a single project
 All cost and benefit estimates must be converted to a common
equivalent monetary unit.
 The sign convention : all costs (+ sign )

 Salvage value: subtracted from cost
2/20/21 50
Benefit/cost analysis of a single project
 The decision guide line
2/20/21 51
Conventional B/C ratio
 The most widely used

 Dis-benefits are subtracted from benefits,
2/20/21 52
Modified B/C ratio
 Dis-benefits are subtracted from benefits,
2/20/21 53
The benefit and cost difference
B - C. If (B - C) > 0,
Example Page 347
2/20/21 54
Alternative selection using incremental b/c analysis
 The incremental (conventional) B/C ratio is determined using
PW, AW, or FW calculations, and the extra-cost alternative is
justified if this B/C ratio is equal to or larger than 1.0. The
selection rule is as follows:
 If incremental B/C > 1.0, choose the higher-cost

alternative, because its extra cost is economically
justified.
 If incremental B/C < 1.0, choose the lower-cost
alternative.
2/20/21 55
 all costs have a positive sign in the B/C ratio.

 Also, the ordering of alternatives is done on the basis of
total costs in the denominator of the ratio.
 Thus, if two alternatives, A and B, have equal initial
investments and lives, but B has a larger equivalent annual
cost, then B must be incrementally justified against A
2/20/21 56
Follow these steps to correctly perform a conventional B/C ratio
analysis of two alternatives.
 Determine the total equivalent costs for both alternatives.
 Order the alternatives by total equivalent cost; smaller first, then larger.
Calculate the incremental cost (∆C) for the larger-cost alternative. This is
the denominator in B/C.
 Calculate the total equivalent benefits and any dis-benefits estimated for
both alternatives. Calculate the incremental benefits (∆B) for the larger cost
alternative. (This is ∆(B - D) if dis benefits are considered.)
 Calculate the incremental B/C ratio using Equation, (B - D)/ c.
 Use the selection guideline to select the higher-cost alternative if B/C >1.0.
2/20/21 57
Example 1
1. Apply incremental B/C analysis at an interest rate of 8% per
year to determine which alternative should be selected. Use a
20-year study period, and assume the damage costs might
occur in year 6 of the study period.
2/20/21 58
1. Determine the total equivalent costs for both alternatives.
 Pw of Alt A = 600,000 + 50,000(P/A,8%,20)
 Pw of Alt B = 800,000 + 70,000(P/A,8%,20)
2. Order the alternatives by total equivalent coast. Then calculate the
incremental cost (∆C) for the larger-cost alternative
 ∆C = (800,000 – 600,000) + (70,000 – 50,000)(P/A,8%,20) = $396,362
3. Calculate the total equivalent benefit and any disbenefit. Then
calculate the incremental benefit (∆B).
 ∆B = (950,000 – 250,000)(P/F,8%,6) = 441,140
4. Calculate the incremental B/C
 ∆B/∆C = 441,140/396,362 = 1.11
5. Use the selection guideline to select the higher cost alternative.
 Select alternative B
2/20/21 59
Example 2
2. A firm is trying to decide which of two devices to install to reduce

costs in a particular situation. Both devices cost $1000 and have
useful lives of 5 years and no salvage value. Device A can be
expected to result in $300 savings annually. Device B will provide
cost savings of $400 the first year, but savings will decline by $50
annually, making the second...year savings $350, the third-year
savings $300, and so forth. With interest at 7%, which device should
the firm purchase.
2/20/21 60
Example 2
Soln
Device A Device B
Pw of cost = 1000 Pw of cost = 1000
Pw of benefit= 300(P/A,7%,5) Pw of benefit= 400(P/A,7%,5) –
= 300(4.100) 50(P/G,7%,5)
= 1230 = 400(4.100) – 50(7.647)
= 1258
B/C = 1230 = 1.23 B/C = 1258 = 1.26

1000 1000
2/20/21 61
Example 3
3. Two machines are being considered for purchase.

Assuming 10% interest, which machine should be
bought?
2/20/21 62
Incremental B/C analysis of multiple, mutually
exclusive alternatives
Choose the largest-cost alternative that is justified with an

incremental B/C ≥ 1.0 when this selected alternative has
been compared with another justified alternative.
2/20/21 63
Example 1
1. Consider the five mutually exclusive alternatives. They

have 20-year useful lives and no salvage value. If the
minimum attractive rate of return is 6%, which
alternative should be selected?
2/20/21 64
Example 2
2. The Army Corps of Engineers wants to construct a dam on
a flood-prone river. The estimated construction cost and
average annual dollar benefits are listed below. (a) If a
6% per year rate applies and dam life is infinite for
analysis purposes, select the one best location using the
B/C method. If no site is acceptable, other sites will be
determined later. (b) If more than one dam site can be
selected, which sites are acceptable, using the B/C
method?
2/20/21 65
Pay back period Analysis
Reading Assignment
2/20/21 66

Breakeven Ana

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Break Even Analysis

Break Even Analysis

 Break even analysis refers to the determination of the

The Point at which Revenues = Costs

 Fixed Costs - Costs that do not change in total with the

Fixed costs (level)

Revenue –Costs = Profit

Total cost = fixed costs + variable costs (quantity):

Break-even point is where total costs = revenue:

Breakeven is the point where Profit = 0

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

$20(#Tickets) – $2000 = $0#Tickets = 2000/20

15,000(A/P, 12%, 20) = PASPHALT(A/P, 12%, 10)

28,000(A/P, 15%, n) = 20,000(A/P, 15%, 5)

28,000(A/P, 15%, n) = 5,966

4. If the anticipated level is below the breakeven value, select the

-12,000(A/P,8%,3) – 45,000 + 2000(A/F,8%,3) –8x = -20x

x = 4087 ads per year breakeven .xlsx

 Machine A has a fixed cost of $40,000 per year and a

Variable cost for B = 2000/200 = $10/unit

40,000 + 60(2000 units) = FCB + 10(2000 units)

FCB = $140,000 per year

Stocks, bonds, loans,

Higher, based on market cost

Alternative selection Primarily based on rate of

Environment of the Primarily economic

Stocks, bonds, loans,

Higher, based on market cost

Alternative selection Primarily based on rate of

Environment of the Primarily economic

Stocks, bonds, loans,

Higher, based on market cost

Alternative selection Primarily based on rate of

Environment of the Primarily economic

Stocks, bonds, loans,

Higher, based on market cost

Alternative selection Primarily based on rate of

Environment of the Primarily economic

Stocks, bonds, loans,

Higher, based on market cost

Alternative selection Primarily based on rate of

Environment of the Primarily economic

Stocks, bonds, loans,

Higher, based on market

Alternative selection Primarily based on rate of

Environment of the Primarily economic

Stocks, bonds, loans,

Higher, based on market cost

Alternative selection Primarily based on rate of

Environment of the Primarily economic

Stocks, bonds, loans,

Higher, based on market cost

Alternative selection Primarily based on rate of

Environment of the Primarily economic

Stocks, bonds, loans,

Higher, based on market cost

Alternative selection Primarily based on rate of

Environment of the Primarily economic

 The sign convention : all costs (+ sign )

 The most widely used

 Dis-benefits are subtracted from benefits,

Example Page 347

 If incremental B/C > 1.0, choose the higher-cost

 all costs have a positive sign in the B/C ratio.