Calculate Breakeven Point Principles of Cost Analysis and

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 = 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 #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 #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 #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 #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

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