Breakeven Analysis
Variable Costs
Vary directly in proportion to activity:
Example: if sales increase by 5%, then
the Variable Costs will increase by 5%
Fixed Costs
Remain the same, regardless of the
activity level
Mixed ________
Combines variable and fixed costs
Variable Costs
Variable Costs VARY directly in proportion
to the changes in Activity Level
Sales
10%
Variable Costs 10%
If the activity level (sales) increases 10%,
then Variable Costs will increase _____% also
Examples of Variable Costs
Raw Materials
Production Labor __________
Variable Overhead
Sales Commissions
Shipping Costs
Factory Power
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Examples of Fixed Costs
Depreciation
Rental ____________
Building Insurance
Automobile Insurance
Property _________
Plant Repair
GRAPH OF VARIABLE COSTS
$
No activity
= zero costs
More activity
means more
costs
Variable
Costs
Begin at the ______ (zero, zero) and
draw the line to the upper right
Q
GRAPH OF FIXED COSTS
$
Begin at Y-axis
and draw
horizontal _____
Fixed
Costs
Q
Quantity in terms of
units sold or produced
2
Fixed Cost + Variable Cost
equals TOTAL COSTS
TOTAL
COST
LINE
$
Add the height
of the Variable
Cost Line to
the height of
Fixed Cost Line
Variable
Costs
Fixed
Costs
At the Y axis, variable costs = 0
So Total Costs = Fixed Costs
Q
GRAPH OF TOTAL COSTS
$
TOTAL
COST
LINE
Variable
Costs
In other words, stack the Variable Cost Line
on top of the Fixed Cost Line
Q
REVENUES &
TOTAL COSTS
$
Breakeven Point is
crossing point of
Revenue line and
Total Cost line
Breakeven
Point
Total
Costs
Revenue – Cost = 0
so Net Income is zero
at Breakeven Point
Q
3
Revenues < Costs = Loss
$
Revenue
When Quantity
is less than
Breakeven
Total
Costs
Total Costs are
more than (above)
Revenue, so Net
Income is a ______
Net Income = Revenue - Cost
Q
Revenues > Costs = Profit
$
When Quantity
is more than
Breakeven
Point
Revenue
Total
Costs
Then the Revenue line is
above (higher) than Total Cost
line, so Net Income is a ______
Q
Net Income = Revenue - Cost
CONTRIBUTION
Unit Contribution = Price - Variable Cost per unit
OR
Contribution Margin =
(Sales – Total Variable Costs)
Sales
Use the Units Contribution (top) formula when
the problem is in units, but use the Contribution
Margin (bottom) formula instead when the problem
gives the Total Sales and Total ______________ Costs
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BE = Fixed Cost ÷ Contribution
Fixed Costs
(Price – Variable Cost)
Breakeven Units =
OR
Breakeven Sales =
Fixed Costs
(Sales-Variable Cost)÷Sales
Use the BE Units (top) formula when the problem is
in units, and the BE Sales (bottom) formula when the
problem gives Total ________ and Total Variable Costs
BREAKEVEN UNITS
Breakeven Units =
Fixed Costs
(Price – Variable Cost)
Example: Acme Manufacturing’s Fixed Costs are
$120,000 per period, and the price per Roadrunner
Trap is $25 while the Variable Cost per trap is $20
Breakeven Units = $120,000 ÷ ($25 - $20)
BREAKEVEN SALES
Fixed Costs
Breakeven Sales =
(Sales-Variable Cost)÷Sales
Example: Acme Manufacturing’s Fixed Costs are
$120,000 per period, while the sales are $750,000
and variable costs are $600,000
$120,000
Breakeven Sales =
($750,000-$600,000)÷$750,000
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Comparison of BE Points
Example: Acme Manufacturing’s Fixed Costs are
$120,000 per period, and the price per Roadrunner
Trap is $25 while the Variable Cost per trap is $20
Acme sold 30,000 traps for a total of $750,000 in
sales and $600,000 in variable costs
Breakeven Units =
Fixed Costs
(Price – Variable Cost)
Breakeven Units = 24,000 Roadrunner Traps
Fixed Costs
Breakeven Sales =
(Sales-Variable Cost)÷Sales
Breakeven Sales = $600,000
24,000 traps at $25 price each equals $600,000
Net Income = Y
Example: Acme Manufacturing’s Fixed Costs are
$120,000 per period, and the price per Roadrunner
Trap is $25 while the Variable Cost per trap is $20
Compute the Net Income if Acme sells 32,000 traps
Net Income = Price*Q –Variable Cost*Q – Fixed Cost
Net Income = $25*32,000 – $20*32,000 – $120,000
Y = Net Income
Example: Acme Manufacturing’s Fixed Costs are
$120,000 per period, and last year Acme sold
30,000 traps for a total of $750,000 in sales and
$600,000 in variable costs
Compute projected Y if projected sales = $800,000
Variable Cost Percentage = (VC÷Sales) last year sales
AND Net Income = Sales – (VC% * Sales) – Fixed Cost
Variable Cost %= $600,000 ÷ $750,000 = .800 VC%
Net Income = $800,000 – (.800*$800,000) – 120,000
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Comparison of Net ________
Example: Acme Manufacturing’s Fixed Costs are
$120,000 per period, and the price per Roadrunner
Trap is $25 while the Variable Cost per trap is $20;
and last year Acme sold 30,000 traps for a total of
$750,000 in sales and $600,000 in variable costs
Compute the projected Net Income if next year Acme
sells 32,000 traps for total sales of $800,000
Net Income = Price*Q –Variable Cost*Q – Fixed Cost
Net Income = $800,000 – $640,000 – $120,000
Net Income = $40,000
Variable Cost Percentage = (VC÷Sales) last year sales
AND Net Income = Sales – (VC% * Sales) – Fixed Cost
Net Income = $800,000 – (.800*$800,000) – 120,000
Net Income = $40,000
SUMMARY of TERMS
Variable Costs vary directly with the activity level
Fixed Costs are assumed to stay the same
Mixed Costs consist of both variable & fixed costs
Total Cost = Variable Costs + Fixed Costs
Breakeven Pt is where Total Cost = Total __________
SUMMARY OF FORMULAS
UNITS
Breakeven Units
Fixed Costs
(Price – Variable Cost)
Total Sales&Costs
Breakeven __________
Fixed Costs
(Sales-Variable Cost)÷Sales
Projected Income
Projected Income
Projected Quantity = Q
Last year’s numbers
PQ – VQ – Fc = Y
VC% = (Variable Cost ÷ Sales)
Projected Sales & FC
S – (VC% * S) – Fc = Y
Use Units (left) formulas when problem is in units,
and Total Sales&Costs (right) formulas when the
problem gives Total Sales and Total Variable Costs
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