The Breakeven Analysis

Order of the Slides

Define Breakeven Analysis Theory behind it What it can be used for Breakeven formula Example Problem Conclusion Reference page

What is a break-even analysis? Breakeven Analysis- A

decision-making aid that enables a manager to determine whether a particular volume of sales will result in losses or profits

The theory behind the breakeven analysis Made up of four basic concepts
Fixed costs- costs that do not change Variable costs- costs that rise in propitiation to sales Revenue- the total income received Profit- the money you have after subtracting fixed and variable cost from revenue

What can it be used for?

Monthly expenses- use it to see if your income is more then your expenses Determine minimum price product can be sold for Determine optimum price product can be sold for Calculate effects of marketing programs on price

Breakeven formula BEP = TFC / SP-VC BEP= TFC/CM TFC = TOTAL FIXED COST SP= SELLING PRICE VC= VARIABLE COST CM= CONTRIBUTION MARGIN

This chart shows that the breakeven point is where the income and costs are equal

Profit = Total Revenues (TR) Total Cost (TC) P = (SP x Q) (FC + TVC) P = (SP x Q) (FC + VC x Q) Recall, at BEP, P = 0 since TR TC = 0

Cost

Fixed

Variable

Land
Machinery Insurance

X
X X

TAXES
Equipment rantal Raw Material Direct labor Overtime Freight

X
X X X X X

Example:
A firm is operating with a fixed cost of RM5, 000 per month and a variable cost of RM25 per unit. It sells its product at RM35 per unit.
a. Find the break even point b. Determine the profit if the sales volume is 300 units. c. determine the profit if the sales volume is 700 units. d. If the firms target profit is RM 8,000 per month, calculate the expected number of output or volume to be produced.

A local manufacturer, PERMATA Sdn.Bhd. decides to relocate its existing obsolete plant. The company had done a study on several locations and finally came out with three alternatives.

The product can be sold for RM180 per unit and the estimated annual production for each location is 25,000 units.

Tangga Batu Utilities Building Equipment 120,000 700,000 600,000

Tanjung Kling 250,000 450,000 700,000

Bukit Rambai 180,000 600,000 550,000

Tangga Batu Labor Raw material Overhead Expenses Freight 30 25 28 17

Tanjung Kling 29 24 17 15

Bukit Rambai 28 26 30 16

 Calculate the BEP for each location How much each location has to produce to gain a profit of RM10,000 Determine the profit for each location based on the expected annual production volume. Which location should be selected ?

Example 3
ELBA Company is considering whether to make or buy the electrical component that is needed for installation in order to complete the manufacture of ELBA refrigeratiors. The component can be bought from a local manufacturer at a price of RM48 / unit. To manufacture the component, ELBA Company will incur a fixed cost of RM1.5 million and variable cost of RM18 per unit.

 Labu-Labi Sdn.Bhd. produces and sells tonic in the East Coast of Malaysia. They expect to move to the West Coast instead of the current location. The leading candidates location will have a monthly fixed cost of RM3,000, labor cost of RM0.30 per bottle and material cost of RM0.30/botte. The tonic sells for RM1.60/bottle. a) What is the breakeven quality ? b) Show the total return for a monthly volume of 1000 bottles. c) Determine the quantity that will give RM12,000 in profit.

7.

En. Ahmad Spanner, aretired government mechanic, wants to open a rustproofing business at either Sect 22 Shah Alam or Puchong Perdana. His target customers would be most new-car dealers in the area and also car enthusiasts. A location in Shah Alam would involve a fixed monthly costs of RM7,000. Labor, materials and transportation costs would be RM30 per car. A location in Puchong Perdana would have a fixed monthly costs of RM4,700 and labor materials and transportation costs of RM40 per car. Customer will be charged RM90 per car at either location.

a) Which location would yield the greatest profit if monthly demand were ? i. 200 cars ii. 300 cars b) At what sales volume would the two locations in indifferent to En. Ahmad ?

 Calculated and explain in the BEP If the annual demand for the gadget is 55,000 units, what should ELBA do?

Example
Lets say you own a business selling burgers It costs $1.00 to make one burger Thats your V or Variable cost

You sell each burger for $2.80 Thats your P or price per unit
Your cost for rent, utilities, overhead, etc... is $100,000 per month That's your F or fixed cost

Example cont.
V = $1.00 P = $2.80 F = $100,000 X = F /( P V) X = 100,000 / ( 2.80 - 1 ) X = 100,000 / ( 1.80 ) X = 55,555 To breakeven you would need to sell 55,555 burgers

Problem
Try out this problem for your self

You own a lemonade stand It costs you $0.05 to make cup of lemonade You sell your lemonade for $0.25 It cost you $50.00 to make the stand How many cups of lemonade do you have to sell to breakeven? Solve now

Answer
X = F /( P V) X = 50 / ( .25 - .05 ) X = 50/ ( .20 ) X =250 You would need to sell 250 cups of lemonade to breakeven.

Conclusion
A Breakeven Analysis is a simple tool to use to determine if you have priced your product correctly A Breakeven Analysis helps you calculate how much you need to sell before you begin to make a profit. You can also see how fixed costs, price, volume, and other factors affect your net profit.