OPERATION STRATEGY

TECHNOLOGY
ENGINEERING
COST/BREAKEVEN
REPORTER:
JO VINCENT CENIZA
DANILO JOSEPH YPIL
IVAN RAY GEMINA
WHAT IS BREAK-EVEN
ANALYSIS?
A BREAK-EVEN ANALYSIS IS A FINANCIAL CALCULATION THAT WEIGHT THE COSTS OF A NEW
BUSINESS, SERVICE OR PRODUCT AGAINST THE UNIT SELL PRICE TO DETERMINE THE POINT AT
WHICH YOU WILL BREAK EVEN. IN OTHER WORDS, IT REVEALS THE POINT AT WHICH YOU WILL
HAVE SOLD ENOUGH UNITS TO COVER ALL YOUR COSTS. AT THAT POINT, YOU WILL HAVE
NEITHER LOST MONEY NOR MADE A PROFIT.
 WHEN TO USE A
BREAK-EVEN ANALYSIS
A BUSINESS WILL WANT TO USE A BREAK-EVEN ANALYSIS ANYTIME IT CONSIDERS
ADDING COSTS. THESE ADDITIONAL COST COULD COME FROM STARTING A
BUSINESS, A MERGER OR ACQUISITION, ADDING OR DELETING PRODUCTS FROM
THE PRODUCT MIX, OR ADDING LOCATIONS OR EMPLOYEES.

 * EXPANDING A BUSINESS

* BREAK-EVEN POINTS (BEP) WILL HELP BUSINESS OWNERS/CFO’S GET REALITY

CHECK ON HOW LONG IT WILL TAKE AN INVESTMENT TO BECOME PROFITABLE.
 * LOWERING PRICING

* SOMETIMES BUSINESSES NEED TO LOWER THEIR PRICING STRATEGY TO

BEAT COMPETITORS IN A SPECIFIC MARKET SEGMENT OR PRODUCT.

* NARROWING DOWN BUSINESS SCENARIOS

* WHEN MAKING CHANGES TO THE BUSINESS, THERE ARE VARIOUS

SCENARIOS AND WHAT-IFS ON THE TABLE THAT COMPLICATE DECISIONS
ABOUT WHICH SCENARIO TO GO WITH.
 HOW TO CALCULATE
THE BREAKEVEN
POINTS?
 DID YOU KNOW?

* FIXED COSTS
* VARIABLE COSTS
* SELLING PRICE OF THE PRODUCT
EXAMPLE OF BREAKEVEN
POINTS IN UNITS
XYZ CORPORATION HAS CALCULATED THAT IT HAS FIXED COSTS THAT CONSIST OF ITS LEASE,
DEPRECIATION OF ITS ASSETS, EXECUTIVE SALARIES, AND PROPERTY TAXES. THOSE FIXED COSTS ADD
UP TO 60,000. THEIR PRODUCT IS THE WIDGET. THE VARIABLE COSTS ASSOCIATED WITH PRODUCING
THE WIDGET ARE RAW MATERIALS, FACTORY LABOR, AND SALES COMMISSIONS. VARIABLE COSTS
HAVE BEEN CALCULATED TO BE 0.80 PER UNIT. THE WIDGET IS PRICED AT 2.00 EACH.

GIVEN THIS INFORMATION, WE CAN CALCULATE THE BREAKEVEN POINT FOR XYZ CORPORATION’S
PRODUCT, THE WIDGET, USING OUR FORMULA ABOVE:
WHAT HAPPENS TO THE BREAKEVEN POINT IF SALES CHANGE

WHAT IF YOUR SALES CHANGES? FOR EXAMPLE, IF THE ECONOMY IS IN A RECESSION, YOUR SALES MIGHT
DROP. IF SALES DROP, THEN YOU MAY RISK NOT SELLING ENOUGH TO MEET YOUR BREAKEVEN POINT. IN
THE EXAMPLE OF XYZ CORPORATION, YOU MIGHT NOT SELL THE 50,000 UNITS NECESSARY TO BREAK
EVEN.

HOW CUTTING COSTS AFFECTS THE BREAKEVEN POINT

LET’S SAY YOU FIND A WAY TO CUT THE COST OF YOUR OVERHEAD OR FIXED COSTS BY
REDUCING YOUR SALARY BY 10,000. THAT MAKES YOUR FIXED COSTS DROP FROM 60,000 TO
50,000. USING THE SAME FORMULA AND HOLDING ALL OTHER VARIABLES THE SAME, THE
BREAKVEN POINT WOULD BE:

PREDICTABLY, CUTTING YOUR FIXED COSTS DROPS YOUR BREAKEVEN POINT. IF YOU REDUCE YOUR
VARIABLE COSTS BY CUTTING YOUR COSTS OF GOODS SOLD TO 0.60 PER UNIT, ON THE OTHER HAND,
THEN YOUR BREAKEVEN POINT, HOLDING OTHER VARIABLES THE SAME, BECOMES:
THANK YOU!