Breakeven Analysis: A Decision-Making Tool for Determining Profitability, Study notes of Industrial Engineering

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Tutorial:

The Breakeven Analysis

Prepared by Michael Bokor, Delivered by:

Carolus Kaswandi

Order of the Slides

• Define Breakeven

Analysis

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

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

This chart shows that the breakeven point is

where the income and costs are equal

Breakeven formula cont.

• If we rearrange the where the

breakeven is X then the formula

look like this.

X = F /( P – V)

• This formula says that the

breakeven point is where the

number of sales needed to

make the cost equal to the

revenue.

Example

Lets say you own a business selling

burgers

It costs $1.00 to make one burger

That’s your V or Variable cost

You sell each burger for $2.

That’s 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.

F = $100,

X = F /( P – V)

X = 100,000 / ( 2.80 - 1 )

X = 100,000 / ( 1.80 )

X = 55,

To breakeven you would

need to sell 55,555 burgers

Answer

X = F /( P – V)

X = 50 / ( .25 - .05 )

X = 50/ ( .20 )

X =

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,