Calculate Breakeven Point in Units and Revenue Dollars: Intermediate Cost Analysis and Management
Calculate Breakeven Point in Units and Revenue Dollars: Intermediate Cost Analysis and Management
Calculate Breakeven Point in Units and Revenue Dollars: Intermediate Cost Analysis and Management
4.2 1
How do NAF organizations do
this?
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:
• Identify assumptions underlying breakeven analysis
• Communicate key variables in breakeven equation from
scenario
• Define contribution margin
• Enter relevant data into macro enabled templates to
calculate Breakeven Points and graph costs and revenues
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?
4
Review: Cost Terminology
• Fixed Costs –
Costs that do not change in total with the volume produced or sold
5
LSA #1 Check on
Learning
Q1. Which type of cost remains the same in total
when units produced or sold increases?
A1. Fixed Cost
6
LSA #1 Summary
7
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
8
LSA #2 Check on
Learning
Q1. Why do we need assumptions?
A1. To simplify the analysis, following the Cost-
Benefit and Materiality Constraints.
9
The Breakeven Equation
10
Graphic Depiction of
Breakeven
$ 5000
4500
4000
3500
3000
2500 Revenue
2000
1500
1000
500
0
0 25 50 75 100 125 150
Units Sold 11
Graphic Depiction of
Breakeven (Cont.)
$ 5000
4500
4000
3500
3000
2500 Column2
Revenue
2000
1500
1000
500
0
0 25 50 75 100 125 150
Units Sold 12
Graphic Depiction of
Breakeven (Cont.)
$ 5000
4500
4000
3500
3000
Fixed Cost
2500 Column1
2000 Revenue
1500
1000
500
0
0 25 50 75 100 125 150
Units Sold 13
Graphic Depiction of
Breakeven (Cont.)
$ 5000
4500
4000
3500
3000 Fixed Cost
2500 Variable Cost
Total Cost
2000
Revenue
1500
1000
500
0
0 25 50 75 100 125 150
Units Sold 14
Graphic Depiction of
Breakeven (Cont.)
$ 5000
4500
4000
3500
3000 Fixed Cost
2500 Variable Cost
Total Cost
2000
Revenue
1500
1000
500
0
0 25 50 75 100 125 150
Units Sold 15
Graphic Depiction of
Breakeven (Cont.)
$ 5000
4500
4000
3500
3000 Fixed Cost
2500 Variable Cost
Total Cost
2000
Revenue
1500
1000
500
0
0 25 50 75 100 125 150
Units Sold 16
Graphic Depiction of
Breakeven (Cont.)
$ 5000
4500
4000
3500
3000 Fixed Cost
2500 Variable Cost
Total Cost
2000
Revenue
1500
1000
500
0
0 25 50 75 100 125 150
Units Sold 17
LSA #3 Check on
Learning
Q1. How is the breakeven equation expressed?
A1. Revenue – Variable Cost – Fixed Cost = Profit
(which is zero at the breakeven point)
18
LSA #3 Summary
• During this lesson, we gave a graphic
description of a graphed breakeven.
19
Sample Problem
21
Solving the Problem (part 1)
• Identify the key variables in the equation
• What are the fixed costs?
• Facilities cost 500
• Staff (actors who double as servers) 1000
• Kitchen staff 200
• Stage crew 300
• Total 2000
• What are the variable costs?
• $10 Food/Ticket * #Tickets
• What is the revenue?
• $30 Price/Ticket * #Tickets
22
Solving the Problem (part 1)
• Identify the key variables in the equation
• What are the fixed costs?
• Facilities cost 500
• Staff (actors who double as servers) 1000
• Kitchen staff 200
• Stage crew 300
• Total 2000
• What are the variable costs?
• $10 Food/Ticket * #Tickets
• What is the revenue?
• $30 Price/Ticket * #Tickets
23
Solving the Problem (part 1)
• Identify the key variables in the equation
• What are the fixed costs?
• Facilities cost 500
• Staff (actors who double as servers) 1000
• Kitchen staff 200
• Stage crew 300
• Total 2000
• What are the variable costs?
• $10 Food/Ticket * #Tickets
• What is the revenue?
• $30 Price/Ticket * #Tickets
24
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
Units Sold 39
Proving the Solution
• Plug solution into the original equation:
40
Critical Thinking Questions
• Is this quantity of tickets feasible?
• Why or why not?
41
LSA #4 Check on
Learning
Q1. Does the Unit Contribution Margin appear in
the Breakeven Equation?
A1. Yes, indirectly. Contribution Margin is
equal to Revenue – Variable Cost
42
LSA #4 Summary
• During this lesson, we conducted a
demonstration exercise identifying key
variables, defining a contribution margin, and
then calculating a breakeven point in units
using an equation.
43
Sample Problem – Target
Profit
• How many tickets must be sold to yield a profit of
$500 per show? $1000 per show?
• How would you set up the equation?
44
Sample Problem – Target
Profit (Cont.)
• How many tickets must be sold to yield a profit of
$500 per show? $1000 per show?
• How would you set up the equation?
• Use the Breakeven equation, replacing zero with the
target profit number:
$30(#Tickets) - $10(#Tickets) – $2000 = $500
45
Conduct Practical Exercise
46
Using the Breakeven
Spreadsheet
47
Using the Breakeven
Spreadsheet (Cont.)
49
Using the Breakeven
Spreadsheet (Cont.)
50
Conduct Practical Exercise
51
TLO Summary
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:
• Identify assumptions underlying breakeven analysis
• Communicate key variables in breakeven equation from
scenario
• Define contribution margin
• Enter relevant data into macro enabled templates to
calculate Breakeven Points and graph costs and revenues
52