Calculate Breakeven Point © Dale R. Geiger 20111.

© Dale R. Geiger 2011 1

Calculate Breakeven Point

Principles of Cost Analysis and Management


How do NAF organizations do this?

User Fees Costs


Terminal Learning Objective

• Action: Calculate breakeven point in units and revenue dollars

• Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors.

• Standard: With minimum of 80% accuracy: 1. Identify assumptions underlying breakeven analysis2. Identify key variables in breakeven equation from scenario3. Define contribution margin 4. Enter relevant data into macro enabled templates to

calculate Breakeven Points and graph costs and revenues


What is Breakeven?

• The Point at which Revenues = Costs• Revenues above the breakeven point result in profit• Revenues below the breakeven point result in loss

• May be measured in units of output or revenue dollars

• Represents a “Reality Check” • Is this level of revenue reasonable?• If not, what actions would yield a reasonable

breakeven point?


Review: Cost Terminology• Fixed Costs - Costs that do not change in total

with the volume produced or sold• Variable Costs - Costs that change in direct

proportion with the volume produced or sold• Mixed Costs - A combination of fixed and variable

costs• Semi-variable Cost - Costs that change with

volume produced, but not in direct proportion


























Check on Learning

• Which type of cost remains the same in total when units produced or sold increases?

• Which type of cost remains the same per unit when units produced or sold increases?


Identify Assumptions

• The following are implied in the simple breakeven equation:• A single product or service• Clearly segregated fixed and variable costs• Variable costs are linear on a per-unit basis

• If analyzing multiple products is desired:• Use “$1 of Revenue” as the Unit -or-• Use a weighted average unit


Check on Learning

• Why do we need assumptions?• How many products do we use in breakeven

analysis?


The Breakeven Equation Revenue – Costs = Profit


The Breakeven Equation Revenue –Costs = Profit

Revenue - Variable Cost - Fixed Cost = Profit




Breakeven Point is where Profit = 0

Revenue - Variable Cost - Fixed Cost = 0Revenue = Variable Cost + Fixed Cost




Breakeven Point is where Profit = 0

Revenue - Variable Cost - Fixed Cost = 0Revenue = Variable Cost + Fixed Cost

Revenue = #Units Sold * Selling Price $/UnitVariable Cost = #Units Sold * Variable Cost $/Unit

17

Graphic Depiction of Breakeven

0 25 50 75 100 125 1500

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Revenue

$

Units Sold© Dale R. Geiger 2011

18


0 25 50 75 100 125 1500

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Variable CostRevenue

$


19


0 25 50 75 100 125 1500

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Fixed CostVariable CostRevenue

Units Sold

$

© Dale R. Geiger 2011

20


0 25 50 75 100 125 1500

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Fixed CostVariable CostTotal CostRevenue

Units Sold

$


21


0 25 50 75 100 125 1500

500

1000

1500

2000

2500

3000

3500

4000

4500

5000


$


22


0 25 50 75 100 125 1500

500

1000

1500

2000

2500

3000

3500

4000

4500

5000


$


23


0 25 50 75 100 125 1500

500

1000

1500

2000

2500

3000

3500

4000

4500

5000


$



Check on Learning

• How is the breakeven equation expressed?• Which variables are represented on the graph

by upward sloping lines?


Sample Problem• The following costs are incurred per show at

Sebastian’s Dinner Theater:• 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 Breakeven number of tickets.


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

• What is the revenue?• $30 Price/Ticket * #Tickets




















Define Contribution Margin

• Contribution Margin = Sales – Variable Cost• Unit Contribution Margin Represents the dollar

amount that each unit sold Contributes toward profitUnit Contribution Margin =

Selling Price $/Unit – Variable Cost $/Unit

• What is the Unit Contribution Margin for Sebastian’s Dinner Theater?

• For every ticket sold, profit increases by:$30 - $10 = $20
























• Contribution Margin may be stated as a Percentage:Unit Contribution Margin/Unit Selling Price

• Sebastian’s Contribution Margin Percentage = $20/$30 =

$20/$30 = approximately .67 or 67%• For every $1 of sale, profit will increase by

approximately $.67



Revenue – Variable Cost – Fixed Cost = ProfitBreakeven is the point where Profit = 0

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

20(#Tickets) – 2000 = 020(#Tickets) = 2000#Tickets = 2000/20

#Tickets = 100




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

20(#Tickets) – 2000 = 020(#Tickets) = 2000#Tickets = 2000/20

#Tickets = 100




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

$20(#Tickets) – $2000 = $020(#Tickets) = 2000#Tickets = 2000/20

#Tickets = 100




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


#Tickets = 100






#Tickets = 100





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

#Tickets = 2000/20#Tickets = 100





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

#Tickets = 100






#Tickets = 100






#Tickets = 100

44

Graphic Solution

0 25 50 75 100 125 1500

500

1000

1500

2000

2500

3000

3500

4000

4500

5000


$



Proving the Solution

• Plug solution into the original equation:

$30(#Tickets) – $10(#Tickets) – $2000 = $0$30(100) – $10(100) – $2000 = $0

$3000 – $1000 – $2000 = $0


Critical Thinking Questions

• Is this quantity of tickets feasible? • Why or why not?


Check on Learning

• Does the Unit Contribution Margin appear in the Breakeven Equation?

• Using Sebastian’s Dinner theatre data how many tickets must be sold to yield a profit of $500 per show?

• $1000 per show? Sale Price = $30 / ticket Fixed Cost = $2,000

Variable Cost = $ 10 / ticket


Practical Exercise


Practical Exercise

50

Using the Breakeven Spreadsheet

Use Tabs to Navigate

Enter Data from Practical Exercisesin Spaces Provided


51


“Breakeven Point” Tab shows Graphic Solution and Proof Calculation


52


Blue Area indicates Contribution Margin atVarious Quantities




“Cost” Tab Details Fixed Cost, Variable Cost, and Total Cost

Calculate Breakeven Point © Dale R. Geiger 20111.

Documents