HBS Toolkit

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HBS Toolkit License Agreement Harvard Business School Publishing (the Publisher) grants you, the individual user, limited license to use this product. By accepting and using this product, you agree to the terms of service described below. Terms You accept that this product is intended for your use, and you will not duplicate in any form or manner, electronic or otherwise, copies of this product nor distribute this product to anyone else. You recognize that the product and its content are the sole property of the Publisher, and that we have copyrighted the product. You agree that the Publisher is not responsible for any interruption of service or malfunction that is a consequence of the Internet, a service provider, personal computer, browser or other software or hardware components. You accept that there is no guarantee that this product is totally error free. You further understand and accept that the Publisher intends to provide reliable information but does not guarantee the accuracy or completeness of any information, and is not responsible for any results obtained from the use of such information. This license is effective until terminated, when the license or subscription period ends without renewal, or when you destroy this product and any related documentation. The Publisher may terminate your license without notice if you fail to comply with the conditions set forth in this agreement, and may pursue any other legal recourse.

Copyright 1999 President and Fellows of Harvard College

Break-Even Analysis

INTRODUCTION

Contents Introduction: Analysis: Chart: Table:

This sheet Entry screen for fixed and variable costs, pricing/contribution, and volume information Displays break-even point, variable costs, fixed costs, and contribution in dollars and units Output data which generates break-even chart

Overview Managers often want to know the production level where profits earned from a product cover the cost of resources used to create it. Break-even analysis is how we determine this level. The point at which total sales revenues covers the costs of committed resources is called the break-even point. In addition to knowing the break-even point, managers may also want to know the point at which sales volume reaches a pre-set target-profit level. This tool helps you perform both of these calculations. The first is break-even analysis where your goal is to determine how many units you must sell to recover all of your fixed costs. The second is target-profit analysis where your goal is to determine how many units you must sell to reach a pre-defined profit level. The difference between the two is that at break-even your target-profit is zero, whereas when you specify a target-profit that is greater than zero, you are setting your goal above the break-even point.

Directions You may want to print these directions as a reference guide for this tool. These directions provide a general introduction to the contents of each worksheet in the tool. For more detailed directions place your mouse above the red celltips located throughout the tool. See this example --> Analysis: The analysis page is your primary input sheet. Here you will tell the tool what type of analysis you want to perform, input the data required to perform calculations, and view some of the output of those calculations. The chart sheet is one of the two report sheets in this tool. Here you can visually measure your break-even or target-profit level along with total fixed and variable costs. If you chose to calculate the number of months before you reach break-even or target-profit those numbers will be reported here. The table sheet is the second output report and contains the data used to generate the break-even/target-profit chart. This includes ten data points on either side of the break-even/target-profit point.

Chart:

Table:

Important Note: This tool is based on a Microsoft Excel worksheet. Any changes you make to this file are permanent once you save the file. To re-use this tool as a template for break-even calculations, always open a new copy of the tool and save your results with a different file name. To start using the tool, remove the sample data from the tool using the Show/Hide Sample Data option under the HBS Menu

Break-Even Analysis
Sample Problem

INTRODUCTION

A company wants to begin selling a new pair of hand-held pliers in the upcoming fiscal year. They want to know how many hand-held pliers they will have to sell in order to break-even on this investment in materials and equipment. They received the following data from the chief financial officer:

Fixed costs Metal molding machine: Plastic grip molder: Sander: Variable costs (per unit) Packaging material: Raw material Grip material: Shipping

$100,000 $25,000 $5,000

$1.00 $1.00 $0.50 $0.50

The marketing department estimates that they can sell their new pliers for $15.00 per unit. They further project that they will average 1200 units per month. The goal is that they will break-even and start to earn a profit within the first year. His target-profit level for the end of the first fiscal year is $100,000.

Note About Using Internet Explorer The default setting in Internet Explorer is to open these tools in the Explorer application insteadof Excel. We recommend against this and provide directions in the Help section of the HBSToolkit web site to change this default behavior.

HBS Menu Show/Hide Sample Data: Show Calculator: Show/Hide Celltips: Print Sheet with Celltips: Set Zoom: Visit Web Links: About HBS Toolkit:

Displays or removes sample entries Launches Windows calculator Toggles in/out red Celltips in documented cells Prints Celltip documentation on current sheet Provides quick access to 80%, 100%, and 125% zoom levels Links to HBS Toolkit website, Toolkit Glossary, and Toolkit Feedback, as well as HBS and HBS Publishing web sites Launches the about box for the HBS Toolkit

Jon B. DeFriese MBA `00 and Chad Ellis, MBA `98 developed this software under the supervisionof Professor Steven Wheelwright as the basis for class discussion rather than to illustrate eitherthe effective or ineffective handling of an administrative situation.
Copyright 1999 President and Fellows of Harvard College

Break-Even Analysis

ANALYSIS

Solve for:
Break-Even Point Target Profit

Product Name:

$0.00 Variable Costs per Unit $100,000.00 $25,000.00 $5,000.00 Item 1 Item 2 Item 3 Item 4 Item 5 Item 6 Item 7 Item 8 Var. Costs/Unit: $1.00 $1.00 $0.50 $0.50

Fixed Costs Item 1 Item 2 Item 3 Item 4 Item 5 Item 6 Item 7 Item 8 Fixed Costs:

$130,000.00

$3.00

Pricing and Contribution Unit Price: Unit Contribution Margin: $15.00 $12.00

Volume Break-Even Volume: Expected Sales Per Month:

Sales per month expressed in: Units
Dollars

10,833 1,200

Notes:

Copyright 1999 President and Fellows of Harvard College

Break-Even Analysis

BREAK-EVEN CHART

$350,000 $300,000 $250,000

Dollars

$200,000 $150,000 $100,000 $50,000 $0 0 2167 4333 6500 8666 10833 13000 15166 17333 19499 21666

Number of Units
Total Fixed Costs Total Variable Costs Total Sales Revenues

Units Required for Break-Even: Dollar Sales Required for Break-Even: Variable Costs Per Unit: Total Variable Costs: Total Fixed Costs: Months to Break-Even:

10,833 $162,500.00 $3.00 $32,499.00 $130,000.00 9.0

Copyright 1999 President and Fellows of Harvard College

Break-Even Analysis

BREAK-EVEN TABLE

Number of Units

Total Fixed Costs

Total Variable Costs

Total Sales Revenues

0 1083 2167 3250 4333 5417 6500 7583 8666 9750 10833 11916 13000 14083 15166 16250 17333 18416 19499 20583 21666

$130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000

$0 $3,250 $6,500 $9,750 $13,000 $16,250 $19,499 $22,749 $25,999 $29,249 $32,499 $35,749 $38,999 $42,249 $45,499 $48,749 $51,998 $55,248 $58,498 $61,748 $64,998

$0 $16,250 $32,499 $48,749 $64,998 $81,248 $97,497 $113,747 $129,996 $146,246 $162,495 $178,745 $194,994 $211,244 $227,493 $243,743 $259,992 $276,242 $292,491 $308,741 $324,990

Copyright 1999 President and Fellows of Harvard College