Calculate Breakeven Point
Principles of Cost Analysis and
Management
© Dale R. Geiger 2011
1
How do NAF organizations do this?
User Fees
Costs
© Dale R. Geiger 2011
2
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
3. Define contribution margin
4. Enter relevant data into macro enabled templates to
calculate Breakeven Points and graph costs and revenues
© Dale R. Geiger 2011
3
What is Breakeven?
• The Point at which Revenues = Costs
• Revenues above the breakeven point result in profit
• 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?
© Dale R. Geiger 2011
4
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 fixed and variable
costs
• Semi-variable Cost - Costs that change with
volume produced, but not in direct proportion
© Dale R. Geiger 2011
5
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 fixed and variable
costs
• Semi-variable Cost - Costs that change with
volume produced, but not in direct proportion
© Dale R. Geiger 2011
6
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 fixed and variable
costs
• Semi-variable Cost - Costs that change with
volume produced, but not in direct proportion
© Dale R. Geiger 2011
7
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 fixed and variable
costs
• Semi-variable Cost - Costs that change with
volume produced, but not in direct proportion
© Dale R. Geiger 2011
8
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 fixed and variable
costs
• Semi-variable Cost - Costs that change with
volume produced, but not in direct proportion
© Dale R. Geiger 2011
9
Check on Learning
• Which type of cost remains the same in total
when units produced or sold increases?
• Which type of cost remains the same per unit
when units produced or sold increases?
© Dale R. Geiger 2011
10
Identify Assumptions
• The following are implied in the simple
breakeven equation:
• A single product or service
• Clearly segregated fixed 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
© Dale R. Geiger 2011
11
Check on Learning
• Why do we need assumptions?
• How many products do we use in breakeven
analysis?
© Dale R. Geiger 2011
12
The Breakeven Equation
Revenue – Costs = Profit
© Dale R. Geiger 2011
13
The Breakeven Equation
Revenue –Costs = Profit
Revenue - Variable Cost - Fixed Cost = Profit
© Dale R. Geiger 2011
14
The Breakeven Equation
Revenue –Costs = Profit
Revenue - Variable Cost - Fixed Cost = Profit
Breakeven Point is where Profit = 0
Revenue - Variable Cost - Fixed Cost = 0
Revenue = Variable Cost + Fixed Cost
© Dale R. Geiger 2011
15
The Breakeven Equation
Revenue –Costs = Profit
Revenue - Variable Cost - Fixed Cost = Profit
Breakeven Point is where Profit = 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
© Dale R. Geiger 2011
16
Graphic Depiction of Breakeven
$ 5000
4500
4000
3500
3000
2500
Revenue
2000
1500
1000
500
0
0
25
50
75
100
Units Sold
© Dale R. Geiger 2011
125
150
17
Graphic Depiction of Breakeven
$ 5000
4500
4000
3500
3000
2500
Variable Cost
2000
Revenue
1500
1000
500
0
0
25
50
75
100
Units Sold
© Dale R. Geiger 2011
125
150
18
Graphic Depiction of Breakeven
$ 5000
4500
4000
3500
3000
Fixed Cost
2500
Variable Cost
2000
Revenue
1500
1000
500
0
0
25
50
75
100
Units Sold
© Dale R. Geiger 2011
125
150
19
Graphic Depiction of Breakeven
$ 5000
4500
4000
3500
3000
Fixed Cost
2500
Variable Cost
2000
Total Cost
1500
Revenue
1000
500
0
0
25
50
75
100
Units Sold
© Dale R. Geiger 2011
125
150
20
Graphic Depiction of Breakeven
$ 5000
4500
4000
3500
3000
Fixed Cost
2500
Variable Cost
2000
Total Cost
1500
Revenue
1000
500
0
0
25
50
75
100
Units Sold
© Dale R. Geiger 2011
125
150
21
Graphic Depiction of Breakeven
$ 5000
4500
4000
3500
3000
Fixed Cost
2500
Variable Cost
2000
Total Cost
1500
Revenue
1000
500
0
0
25
50
75
100
Units Sold
© Dale R. Geiger 2011
125
150
22
Graphic Depiction of Breakeven
$ 5000
4500
4000
3500
3000
Fixed Cost
2500
Variable Cost
2000
Total Cost
1500
Revenue
1000
500
0
0
25
50
75
100
Units Sold
© Dale R. Geiger 2011
125
150
23
Check on Learning
• How is the breakeven equation expressed?
• Which variables are represented on the graph
by upward sloping lines?
© Dale R. Geiger 2011
24
Sample Problem
• The following costs are incurred per show at
Sebastian’s Dinner Theater:
•
•
•
•
•
Facilities cost
Staff (actors who double as servers)
Kitchen staff
Stage crew
Food cost (per ticket)
$500
1000
200
300
10
• Ticket Price is $30
• Task: Calculate Breakeven number of tickets.
© Dale R. Geiger 2011
25
Solving the Problem (part 1)
• Identify the key variables in the equation
• What are the fixed costs?
•
•
•
•
•
Facilities cost
Staff (actors who double as servers)
Kitchen staff
Stage crew
Total
500
1000
200
300
2000
• What are the variable costs?
• $10 Food/Ticket * #Tickets
• What is the revenue?
• $30 Price/Ticket * #Tickets
© Dale R. Geiger 2011
26
Solving the Problem (part 1)
• Identify the key variables in the equation
• What are the fixed costs?
•
•
•
•
•
Facilities cost
Staff (actors who double as servers)
Kitchen staff
Stage crew
Total
500
1000
200
300
2000
• What are the variable costs?
• $10 Food/Ticket * #Tickets
• What is the revenue?
• $30 Price/Ticket * #Tickets
© Dale R. Geiger 2011
27
Solving the Problem (part 1)
• Identify the key variables in the equation
• What are the fixed costs?
•
•
•
•
•
Facilities cost
Staff (actors who double as servers)
Kitchen staff
Stage crew
Total
500
1000
200
300
2000
• What are the variable costs?
• $10 Food/Ticket * #Tickets
• What is the revenue?
• $30 Price/Ticket * #Tickets
© Dale R. Geiger 2011
28
Solving the Problem (part 1)
• Identify the key variables in the equation
• What are the fixed costs?
•
•
•
•
•
Facilities cost
Staff (actors who double as servers)
Kitchen staff
Stage crew
Total
500
1000
200
300
2000
• What are the variable costs?
• $10 Food/Ticket * #Tickets
• What is the revenue?
• $30 Price/Ticket * #Tickets
© Dale R. Geiger 2011
29
Define Contribution Margin
• Contribution Margin = Sales – Variable Cost
• Unit Contribution Margin Represents the dollar
amount that each unit sold Contributes toward
profit
Unit Contribution Margin =
Selling Price $/Unit – Variable Cost $/Unit
• What is the Unit Contribution Margin for
Sebastian’s Dinner Theater?
• For every ticket sold, profit increases by:
$30 - $10 = $20
© Dale R. Geiger 2011
30
Define Contribution Margin
• Contribution Margin = Sales – Variable Cost
• Unit Contribution Margin Represents the dollar
amount that each unit sold Contributes toward
profit
Unit Contribution Margin =
Selling Price $/Unit – Variable Cost $/Unit
• What is the Unit Contribution Margin for
Sebastian’s Dinner Theater?
• For every ticket sold, profit increases by:
$30 - $10 = $20
© Dale R. Geiger 2011
31
Define Contribution Margin
• Contribution Margin = Sales – Variable Cost
• Unit Contribution Margin Represents the dollar
amount that each unit sold Contributes toward
profit
Unit Contribution Margin =
Selling Price $/Unit – Variable Cost $/Unit
• What is the Unit Contribution Margin for
Sebastian’s Dinner Theater?
• For every ticket sold, profit increases by:
$30 - $10 = $20
© Dale R. Geiger 2011
32
Define Contribution Margin
• Contribution Margin = Sales – Variable Cost
• Unit Contribution Margin Represents the dollar
amount that each unit sold Contributes toward
profit
Unit Contribution Margin =
Selling Price $/Unit – Variable Cost $/Unit
• What is the Unit Contribution Margin for
Sebastian’s Dinner Theater?
• For every ticket sold, profit increases by:
$30 - $10 = $20
© Dale R. Geiger 2011
33
Define Contribution Margin
• 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, profit will increase by
approximately $.67
© Dale R. Geiger 2011
34
Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
(30-10)(#Tickets) – 2000 = 0
20(#Tickets) – 2000 = 0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100
© Dale R. Geiger 2011
35
Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
20(#Tickets) – 2000 = 0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100
© Dale R. Geiger 2011
36
Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100
© Dale R. Geiger 2011
37
Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100
© Dale R. Geiger 2011
38
Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100
© Dale R. Geiger 2011
39
Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = 0
$20(#Tickets) = $2000
#Tickets = 2000/20
#Tickets = 100
© Dale R. Geiger 2011
40
Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
$20(#Tickets) = $2000
#Tickets = $2000/$20
#Tickets = 100
© Dale R. Geiger 2011
41
Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
$20(#Tickets) = $2000
#Tickets = $2000/$20
#Tickets = 100
© Dale R. Geiger 2011
42
Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
$20(#Tickets) = $2000
#Tickets = $2000/$20
#Tickets = 100
© Dale R. Geiger 2011
43
Graphic Solution
5000
4500
4000
3500
$ 3000
Fixed Cost
2500
Variable Cost
2000
Total Cost
1500
Revenue
1000
500
0
0
25
50
75
100
Units Sold
© Dale R. Geiger 2011
125
150
44
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
© Dale R. Geiger 2011
45
Critical Thinking Questions
• Is this quantity of tickets feasible?
• Why or why not?
© Dale R. Geiger 2011
46
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 profit of $500 per show?
• $1000 per show?
Sale Price = $30 / ticket Fixed Cost = $2,000
Variable Cost = $ 10 / ticket
© Dale R. Geiger 2011
47
Practical Exercise
© Dale R. Geiger 2011
48
Practical Exercise
© Dale R. Geiger 2011
49
Using the Breakeven Spreadsheet
Enter Data from
Practical Exercises
in Spaces Provided
Use Tabs to
Navigate
50
© Dale R. Geiger 2011
Using the Breakeven Spreadsheet
“Breakeven Point” Tab
shows Graphic
Solution and Proof
Calculation
51
© Dale R. Geiger 2011
Using the Breakeven Spreadsheet
Blue Area indicates
Contribution Margin at
Various Quantities
52
© Dale R. Geiger 2011
Using the Breakeven Spreadsheet
“Cost” Tab Details
Fixed Cost, Variable
Cost, and Total Cost
© Dale R. Geiger 2011
53