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Break-Even Analysis Guide

This document discusses break-even analysis, which is a financial calculation that determines the sales volume needed to cover total costs. It defines break-even as the point where costs and revenues are equal, so there is no profit or loss. The document then explains when to use a break-even analysis, such as when expanding a business or lowering prices. It provides the formula for calculating break-even points using fixed costs, variable costs, and selling price. Finally, it gives an example of calculating the break-even point in units for a company called XYZ Corporation.

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262 views20 pages

Break-Even Analysis Guide

This document discusses break-even analysis, which is a financial calculation that determines the sales volume needed to cover total costs. It defines break-even as the point where costs and revenues are equal, so there is no profit or loss. The document then explains when to use a break-even analysis, such as when expanding a business or lowering prices. It provides the formula for calculating break-even points using fixed costs, variable costs, and selling price. Finally, it gives an example of calculating the break-even point in units for a company called XYZ Corporation.

Uploaded by

studentone
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Hello! I’m...

Louie Jane O. Dalida


SLIDESMANIA.C
Breakeven Analysis
SLIDESMANIA.C
Table of Contents.

01 02 03
• How to calculate the
● What Is Break-Even ● When to Use a Break-
breakeven points?
Analysis? Even Analysis

04
● Example of breakeven
points in units
SLIDESMANIA.C
01 What Is Break-Even
Analysis?
SLIDESMANIA.C
Did you know?
A break-even analysis is a financial calculation that weighs the
costs of a new business, service or product against the unit sell
price to determine the point at which you will break even. In other
words, it reveals the point at which you will have sold enough units
to cover all of your costs. At that point, you will have neither lost
money nor made a profit.
SLIDESMANIA.C
02 When to Use a Break-
Even Analysis
SLIDESMANIA.C
Did you know?
Basically, a business will want to use a break-even
analysis anytime it considers adding costs. These
additional costs could come from starting a business, a
merger or acquisition, adding or deleting products from
the product mix, or adding locations or employees.
SLIDESMANIA.C
Did you know?
● Expanding a business

○ Break-even points (BEP) will help business


owners/CFOs get a reality check on how long it
will take an investment to become profitable.
SLIDESMANIA.C
Did you know?
● Lowering pricing

○ Sometime businesses need to lower their pricing


strategy to beat competitors in a specific market
segment or product.
SLIDESMANIA.C
Did you know?
● Narrowing down business scenarios

○ When making changes to the business, there are


various scenarios and what-ifs on the table that
complicate decisions about which scenario to go
with.
SLIDESMANIA.C
03 How to calculate the breakeven
points?
SLIDESMANIA.C
Did you know?
● Fixed Costs
● Variable Costs
● Selling price of the product
SLIDESMANIA.C
SLIDESMANIA.C
Example of breakeven points in

04 units
SLIDESMANIA.C
XYZ Corporation has calculated that it has fixed costs
that consist of its lease, depreciation of its assets,
executive salaries, and property taxes. Those fixed costs
add up to 60,000. Their product is the widget. Their
variable costs associated with producing the widget are
raw material, factory labor, and sales commissions.
Variable costs have been calculated to be 0.80 per unit.
The widget is priced at 2.00 each.
SLIDESMANIA.C
Given this information, we can calculate the
breakeven point for XYZ Corporation's product,
the widget, using our formula above:

60,000 ÷ (2.00 - 0.80) = 50,000 units


SLIDESMANIA.C
What Happens to the Breakeven Point If Sales
Change

What if your sales change? For example, if the economy


is in a recession, your sales might drop. If sales drop,
then you may risk not selling enough to meet your
breakeven point. In the example of XYZ Corporation,
you might not sell the 50,000 units necessary to break
even.
SLIDESMANIA.C
How Cutting Costs Affects the Breakeven Point

Let's say you find a way to cut the cost of your


overhead or fixed costs by reducing your own salary by
10,000. That makes your fixed costs drop from 60,000
to 50,000. Using the same formula and holding all other
variables the same, the breakeven point would be:
50,000 ÷ (2.00-0.80) = 41,666 units
SLIDESMANIA.C
Predictably, cutting your fixed costs drops your
breakeven point. If you reduce your variable
costs by cutting your costs of goods sold to 0.60
per unit, on the other hand, then your breakeven
point, holding other variables the same, becomes:

60,000 ÷ (2.00-0.60) = 42,857 units


SLIDESMANIA.C
THANK YOU! 
SLIDESMANIA.C

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