Slides calculate 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 produ

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Calculate Breakeven Point

Principles of Cost Analysis and Management

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How do NAF organizations do this?

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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 analysis

2. Identify key variables in breakeven equation from scenario

4. Enter relevant data into macro enabled templates to calculate Breakeven Points and

graph costs and revenues

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What is Breakeven?

• The Point at which Revenues = Costs

• Revenues above the breakeven point result in proft

• 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?

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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 fxed and variable costs

• Semi-variable Cost - Costs that change with volume produced, but not in direct

proportion

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sold

proportion

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sold

proportion

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sold

proportion

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sold

proportion

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Identify Assumptions

• The following are implied in the simple breakeven equation:

• A single product or service

• Clearly segregated fxed 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

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Check on Learning

• Why do we need assumptions?

• How many products do we use in breakeven analysis?

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The Breakeven Equation

Revenue – Costs = Proft

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Revenue –Costs = Proft

Revenue - Variable Cost - Fixed Cost = Proft

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Revenue –Costs = Proft Revenue - Variable Cost - Fixed Cost = Proft

Breakeven Point is where Proft = 0 Revenue - Variable Cost - Fixed Cost = 0 Revenue = Variable Cost + Fixed Cost

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Revenue –Costs = Proft Revenue - Variable Cost - Fixed Cost = Proft Breakeven Point is where Proft = 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

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Graphic Depiction of Breakeven

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Units Sold

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$

Units Sold

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Units Sold

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Units Sold

$

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$

Units Sold

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$

Units Sold

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$

Units Sold

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Check on Learning

• How is the breakeven equation expressed?

• Which variables are represented on the graph by upward sloping lines?

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Solving the Problem (part 1)

• Identify the key variables in the equation

• What are the fxed costs?

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Defne Contribution Margin

• Contribution Margin = Sales – Variable Cost

• Unit Contribution Margin Represents the dollar amount that each unit sold

Contributes toward proft

Unit Contribution Margin = Selling Price $/Unit – Variable Cost $/Unit

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

• For every ticket sold, proft increases by:

$30 - $10 = $20

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$30 - $10 = $20

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$30 - $10 = $20

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$30 - $10 = $20

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• 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, proft will increase by approximately $.67

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Revenue – Variable Cost – Fixed Cost = ProftBreakeven is the point where Proft = 0

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

(30-10)(#Tickets) – 2000 = 020(#Tickets) – 2000 = 020(#Tickets) = 2000

#Tickets = 2000/20

#Tickets = 100

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

($30-$10)(#Tickets) – $2000 = $0

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

#Tickets = 2000/20

#Tickets = 100

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

($30-$10)(#Tickets) – $2000 = $0

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

#Tickets = 2000/20

#Tickets = 100

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

($30-$10)(#Tickets) – $2000 = $0

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

#Tickets = 2000/20

#Tickets = 100

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Units Sold

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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

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Critical Thinking Questions

• Is this quantity of tickets feasible?

• Why or why not?

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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 proft of $500 per show?

• $1000 per show?

Sale Price = $30 / ticket Fixed Cost = $2,000

Variable Cost = $ 10 / ticket

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Practical Exercise

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Practical Exercise

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Using the Breakeven Spreadsheet

Use Tabs to Navigate

Enter Data from Practical Exercises

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“Breakeven Point” Tab shows Graphic Solution and Proof Calculation

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Blue Area indicates Contribution Margin at Various Quantities

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

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