Break Even

SUPPLEMENT
Analysis

PowerPoint slides by Jeff Heyl

Copyright © 2017 Pearson Education, Ltd. S7 - 1

 Break-Even Analysis
► Technique for evaluating process and
equipment alternatives
► Objective is to find the point in dollars
and units at which cost equals
revenue
► Requires estimation of fixed costs,
variable costs, and revenue

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 Break-Even Analysis
► Fixed costs are costs that continue even
if no units are produced
► Depreciation, taxes, debt, mortgage
payments
► Variable costs are costs that vary with
the volume of units produced
► Labor, materials, portion of utilities
► Contribution is the difference between
selling price and variable cost

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 Break-Even Analysis
► Revenue function begins at the origin
and proceeds upward to the right,
increasing by the selling price of each
unit
► Where the revenue function crosses
the total cost line is the break-even
point

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 Break-Even Analysis
– Total revenue line
900 –

800 – i dor
Break-even point rr Total cost line
t co
700 –
Total cost = Total revenue
rofi
P
Cost in dollars

600 –

500 –
Variable cost
400 –

300 –
oss or
200 – L rid
r
co
100 – Fixed cost
| | | | | | | | | | | |
0 100 200 300 400 500 600 700 800 900 1000 1100
Figure S7.5
Volume (units per period)
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 Break-Even Analysis
Assumptions
► Costs and revenue are linear

functions
► Generally not the case in the real
world
► We actually know these costs
► Very difficult to verify
► Time value of money is often
ignored
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 Break-Even Analysis
BEPx = x = number
break-even point of units produced
in units TR = total
BEP$ = revenue = Px
break-even point F = fixed
in dollars costs
P = V = variable
pricepoint
Break-even occurs when cost per unit
per unit
(after all TC = total
discounts) costs = F + Vx
TR = TC F
or BEP x =
P–V
Px = F + Vx

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 Break-Even Analysis
BEPx = x = number
break-even point of units produced
in units TR = total
BEP$ = revenue = Px
break-even point F = fixed
in dollars costs
P = V = variable
priceP per F Profit
unit = TRcost
- TCper unit
BEP$ = BEP = P
(after all P – V
x

discounts) – (F + =Vx)
= Px TC total
F costs = F + Vx
= (P – V)/P = Px – F – Vx
= (P - V)x – F
F
= 1 – V/P
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 Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 – (V/P) 1 – [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375

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 Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 – (V/P) 1 – [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375

F $10,000
BEPx = = = 5,714
P–V 4.00 – (1.50 + .75)

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 Break-Even Example
50,000 –
Revenue
40,000 –
Break-even
point Total
costs
Dollars

30,000 –

20,000 –
Fixed costs
10,000 –

| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Units

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 Break-Even Example
Multiproduct Case

Break-even
point in dollars
(BEP$)

where V = variable cost per unit

P = price per unit
F = fixed costs
W = percent each product is of total dollar sales
expressed as a decimal
i = each product
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 Multiproduct Example
Fixed costs = $3,000 per month
ANNUAL FORECASTED
ITEM SALES UNITS PRICE COST
Sandwich 9,000 $5.00 $3.00
Drink 9,000 1.50 .50
Baked potato 7,000 2.00 1.00

1 2 3 4 5 6 7 8 9

ANNUAL ANNUAL WEIGHTED

FORECASTED SELLING VARIABLE FORECASTED % OF SALES CONTRIBUTION
ITEM (i) SALES UNITS PRICE (Pi) COST (Vi) (Vi/Pi) 1 - (Vi/Pi) SALES $ (Wi) (COL 6 X COL 8)

Sandwich
9,000 $5.00 $3.00 .60 .40 $45,000 .621 .248

Drinks
9,000 1.50 0.50 .33 .67 13,500 .186 .125
Baked 7,000
potato 2.00 1.00 .50 .50 14,000 .193 .097

$72,500 1.000 .470

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 Multiproduct Example
Fixed costs = $3,000 per month
ANNUAL FORECASTED
ITEM SALES UNITS PRICE x 12
$3,000 COST
Sandwich 9,000 = $5.00 = $76,596
$3.00
.47
Drink 9,000 1.50 .50
Baked potato 7,000 Daily $76,596
2.00 1.00
=
sales 312 days = $245.50
1 2 3 4 5 6 7 8 9

ANNUAL ANNUAL WEIGHTED

FORECASTED SELLING VARIABLE FORECASTED CONTRIBUTION
ITEM (i) SALES UNITS PRICE (P) COST (V) (V/P) 1 - (V/P) SALES $ % OF SALES (COL 5 X COL 7)

Sandwich
9,000 $5.00 $3.00 .60 .40 $45,000 .621 .248

Drinks
9,000 1.50 0.50 .33 .67 13,500 .186 .125
Baked 7,000
potato 2.00 1.00 .50 .50 14,000 .193 .097

$72,500 1.000 .470

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