Calculate Breakeven Point Principles of Cost Analysis and Management © Dale R Geiger 2011 How NAF organizations this? User Fees Costs © Dale R Geiger 2011 Terminal Learning Objective • • Action: Calculate breakeven point in units and revenue dollars • Standard: With minimum of 80% accuracy: 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 Identify assumptions underlying breakeven analysis Identify key variables in breakeven equation from scenario Defne contribution margin Enter relevant data into macro enabled templates to calculate Breakeven Points and graph costs and revenues © Dale R Geiger 2011 What is Breakeven? • • • The Point at which Revenues = Costs • • Revenues above the breakeven point result in proft 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 Review: Cost Terminology • • Fixed Costs - Costs that 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 fxed and variable costs Semi-variable Cost - Costs that change with volume produced, but not in direct proportion © Dale R Geiger 2011 Review: Cost Terminology • • Fixed Costs - Costs that 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 fxed and variable costs Semi-variable Cost - Costs that change with volume produced, but not in direct proportion © Dale R Geiger 2011 Review: Cost Terminology • • Fixed Costs - Costs that 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 fxed and variable costs Semi-variable Cost - Costs that change with volume produced, but not in direct proportion © Dale R Geiger 2011 Review: Cost Terminology • • Fixed Costs - Costs that 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 fxed and variable costs Semi-variable Cost - Costs that change with volume produced, but not in direct proportion © Dale R Geiger 2011 Review: Cost Terminology • • Fixed Costs - Costs that 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 fxed and variable costs Semi-variable Cost - Costs that change with volume produced, but not in direct proportion © Dale R Geiger 2011 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 Solving the Problem (part 2) Revenue – Variable Cost – Fixed Cost = Proft Breakeven is the point where Proft = $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 = Proft Breakeven is the point where Proft = $30(#Tickets) - $10(#Tickets) – $2000 = $0 ($30-$10)(#Tickets) – $2000 = $0 $20(#Tickets) – $2000 = $20(#Tickets) = $2000 #Tickets = 2000/20 #Tickets = 100 © Dale R Geiger 2011 40 Solving the Problem (part 2) Revenue – Variable Cost – Fixed Cost = Proft Breakeven is the point where Proft = $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 = Proft Breakeven is the point where Proft = $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 = Proft Breakeven is the point where Proft = $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 Fixed Cost Variable Cost Total Cost Revenue 3000 2500 2000 1500 1000 500 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? • $1000 per show? Using Sebastian’s Dinner theatre data how many tickets must be sold to yield a proft of $500 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 ... Dale R Geiger 2011 What is Breakeven? • • • The Point at which Revenues = Costs • • Revenues above the breakeven point result in proft Revenues below the breakeven point result in loss May be... underlying breakeven analysis Identify key variables in breakeven equation from scenario Defne contribution margin Enter relevant data into macro enabled templates to calculate Breakeven Points... organizations this? User Fees Costs © Dale R Geiger 2011 Terminal Learning Objective • • Action: Calculate breakeven point in units and revenue dollars • Standard: With minimum of 80% accuracy: Condition: