ITApps 2009/10
Business Planning using Spreadsheets (BP)
HO-20: PROFITABILITY – BREAKEVEN ANALYSIS
After completing this exercise you will understand how to perform a breakeven analysis
of your business, determining the point at which you are neither making a profit nor a
loss and are just recovering the costs of being in business - hence the name 'breakeven'
point.
Breakeven Analysis
The primary aim of Breakeven Analysis is to determine the level of output at which total
costs just equal total revenue. For example, Bacchus Wines' Breakeven Point would be
the number of cases of wine it needs to sell in order to recover its costs of operating as a
business.
This type of analysis can also be used to examine the sensitivity of profits to changes in
price, fixed costs and/or variable costs.
In order to build a Breakeven model we have to make several simplifying assumptions:
•
Fixed costs (FC) are independent of the level of output;
•
Variable costs (VC) vary directly with the level of output, ie. VC=Quantity Sold x
VC per unit;
•
Total costs (TC)=Fixed costs + Variable costs;
•
Total Revenue (TR)=Price x Quantity Sold;
•
Profits=Total Revenue - Total Costs
Building a Breakeven Model – HO Exercise
1.
Open your bp-ho.xls workbook and insert a new worksheet called ho20.
2.
Using the figure (on p2 below) as a guide, construct a Breakeven table for
Polymerise plc.
3.
Use the following information to create an Input Block in cells (C3:D5). Polymerise
plc manufactures and sells PVC at £750 per ton, has fixed costs of £1,750,000 and
variable costs of £400 per ton of PVC sold.
4.
Use the same column headings as in the figure: Quantity Sold (0 to 10,000 tons in
250 unit increments), Total Revenue, Variable Costs, Fixed Costs, Total Costs and
Profits.
5.
Enter formulas in cells (B8:F48) that calculate Total Revenue, Variable Costs, Fixed
Costs Total Costs and Profits at each Quantity Sold.
6.
Note: (i) use cell/range names where appropriate; (ii) enter the formulas in cells
(B8:F8) and then use AutoFill to enter the formulas in the other cells.
7.
Finally use the data in the table to construct a Breakeven chart which shows the
variation in costs, revenues and profits with quantity sold (use the Breakeven Chart
shown below as a guide).
FURTHER READING AND RESOURCES
•
•
•
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Breakeven Analysis: http://en.wikipedia.org/wiki/Break_even_analysis
Breakeven Analysis: http://tutor2u.net/business/production/break_even.htm
Breakeven Analysis: http://www.bized.co.uk/collins/pdf/bized_sample_activity1.pdf
Breakeven Analysis:
http://entrepreneurs.about.com/od/businessplan/a/breakeven.htm
bpho20.doc
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ITApps 2009/10
bpho20.doc
Business Planning using Spreadsheets (BP)
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ITApps 2009/10
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Business Planning using Spreadsheets (BP)
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