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breakevenanalysis.xls

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Definition


Breakeven Analysis
	Breakeven analysis is a tool used to determine the level of sales needed to balance costs and revenues.
	This tool can also be used to determine the level of sales needed to reach a specific profit (target profit).
	Conversely, this tool may determine the selling price needed to achieve a specific profit given the level of
	demand (target return pricing).
	Finally, this tool provides an analysis of how sensitive the profit is to variations in sales (sensitivity analysis).
Vocabulary
	Variable Cost Ratio
	The Variable Cost Ratio is the ratio of Variable costs to Sales.
	VCR = Variable Cost / Sales
	Alternatively, VCR = Variable Cost per unit / Selling Price
	For instance, if variable cost per unit is $ 045 , with a price per unit of $ 100 , the VCR is equal to
	$ 045 / $ 100 = 45%.
	The $ 055 remaining constitute the Contribution Margin Per Unit,
	and the Contribution Margin Ratio (CMR, in percent) is therefore equal to
	$ 055 / $ 100 = 55%.
	The Contribution Margin per Unit is the amount of revenue per unit that is available to "contribute" to fixed costs and to profit, since the
	variable costs are accounted for.
	Change the numbers in the following fields to obtain an illustration pertinent to your case:
		Variable cost = $	45.00	Selling Price = $	100.00
	Sensitivity Analysis
	The sensitivity analysis looks at the profit levels around the breakeven point. If you set the range to 50%, with increments of 10, then you
	will get a table with levels of income between 50% and 150% of the breakeven dollar point in increments of 10% points.
	It is important to note that the higher the proportion of fixed costs, the more sensitive the profit: a small change in sales will impact the
	profit significantly when the proportion of variable costs to sales (the Variable Cost Ratio) is low.
	Profit = Sales - Total Costs
	Total Costs = Fixed Costs + Variable Costs
	Target profit
	Refers to the organizations profit goal. Companies are usually more concerned about realizing a specific profit level, as opposed to
	breaking even. By specifying the target profit required, you can compute the sales needed to achieve this target.
	The Target return expresses the target profit as a percentage of those sales.
	Fixed costs and variable costs
	A variable cost varies directly with the number of units produced. Each unit produced will incur a specific cost (materials required etc.),
	this cost to the company will increase in direct proportion to the number of units produced. That is, the more units that are produced, the
	greater the variable cost.
	Typical variable costs are:
	Materials
	Commission/hourly wage
	Variable utilities (machine power etc.)
	A fixed cost remains constant for a particular range of activity. That is, regardless of the number of units produced within a range, the
	fixed costs will remain constant.
	Typical fixed costs are:
	Rent, mortgage
	Equipment
	Salary
	Fixed utilities (factory lighting etc.)
	For instance, you decide to sell cookies next summer. Each cookie uses raw materials (flour, chocolate chunks...), packaging (plasting
	bags) and an amount of electricity (utility). All of these are variable costs.
	You also need a kitchen to cook the cookies (a fixed cost: one stove you may rent or purchase allows you to cook, say, 1000 cookies a
	day; renting or purchasing a second stove, 1000 more), labor (people to cook, transport and sell the cookies), as well as a car (another
	fixed cost) to transport the cookies to the Point of Sale.
	For a practical illustration, please follow the tutorial.

Tutorial

Assuming you already know the price of your product, a typical breakeven analysis requires:

-- to determine the variable cost ratio,

-- to determine the Breakeven points,

-- to draw a graph.

1) Variable Cost Ratio.

First, you need to determine your variable costs.

For instance, you decide to sell cookies next summer.

You determine that each batch of 100 cookies uses:

2 units of flour at $ 2.00 per unit

4.00

1 unit of chocolate chunks at $ 2.00 per unit

2.00

12 eggs at $ 0.10 each

1.20

10 cookie-boxes at $ 0.20 each

2.00

4000 watts of electricity at $ 0.20 a kilowatt

0.80

All these variable costs total:

$ 010

You set the price for a box of 10 cookies to $ 4.00, hence $ 40.00 for 100 cookies.

Therefore, for 100 cookies:

Your variable costs per unit (or batch of units) are $

10.00

with a selling price per unit (or batch) of $

40.00

The variable cost ratio is:

= Variable costs / Selling Price

= $ 010 / $ 040

= 25%

2) Breakeven points.

Your next step is to determine the amount of fixed costs per year.

Following on the cookies venture example, you need a kitchen at $10,000.00 that should last for two years,

5,000.00

a car to deliver the cookies ($5,000.00 per year in maintenance costs, gas, loan payments),

5,000.00

and a point of sale (a shop from where to sell the cookies) that you rent for $2,000.00 per month.

24,000.00

All these fixed costs amount, on a yearly basis, to: $

34,000.00

With a fixed cost per year of $

34,000.00

A variable cost ratio of

25.0%

and a selling price per unit or batch of $

40.00

(Breakeven revenue in $)

= Fixed costs / (1 - Variable Cost Ratio)

= $34, 000 / 75%

= $45, 333 of sales must be achieved yearly for turning a profit.

(Breakeven Unit sales)

= Breakeven sales / selling price

= $45, 333 / $ 040

= 113 3 units per year must be sold to make a profit.

3) Breakeven graph.

Units

1133

2,267

Fixed costs

34,000.00

Variable costs

- 0

11,333.33

22,666.67

Fixed + variable costs

34,000.00

45,333.33

56,666.67

Sales

- 0

45,333.33

90,666.67

It requires 113 3 units to be sold to breakeven.

At that point, the sales and costs are equal and amount to $ 45, 333

Should sales fall below the breakeven point, the loss will be equal to the difference

between total costs (red) and revenues (green).

If sales get above the breakeven point, the profit will be equal to the difference

between revenues (green) and costs (red).

To draw a breakeven graph:

Draw the total cost curve:

1) When no single unit is sold, total costs equal fixed costs.

2) At the breakeven point, when 113 3 units are sold, the total costs are equal to the breakeven sales ($ 45, 333)

3) The line going through these two points is the total cost curve (red line above in the graph).

Draw the total revenue curve:

1) When no single unit is sold, there is no revenue.

2) At the breakeven point, when 113 3 units are sold, the total costs are equal to the breakeven sales ($ 45, 333)

3) The line going through these two points is the total revenue curve (green line above in the graph).

You're done!

Tutorial

0	0	0	0
0	0	0	0
0	0	0	0

Fixed costs

Variable costs

Fixed + variable costs

Sales

Units

Loss

Profit

Breakeven & Pricing


										Breakeven analysis results
			(required) Total fixed costs (per year) =	400,000.00	(eg, 180000)
	0									$
1) Breakeven revenue (amount of revenue required to breakeven):
	The number to enter in any of the fields below is a percentage between 1 and 99.
	Either					OR
			provide the Variable Cost Ratio	13.0%	(eg, 40)		the Contribution Margin Ratio		(eg, 60)
						The Contribution Margin ratio is 87%
	0
2) Breakeven units (number of units to sell required to breakeven):
	To determine the unit sales required, complete part 1 above and input…
											0
	Either					OR					0
			the selling price per unit	579.26	(eg, 20)		the Contribution Margin per unit		(eg, 12)		0
						The contribution margin per unit is $ 504
	0
3) Target profit (required sales to achieve a given profit):
										Data summary				Units	0	794	1,587
	To determine the target profit, complete part 1 above and input…										Fixed costs =	400,000.00		Fixed costs	400,000.00	400,000.00	400,000.00
											Variable cost ratio =	13.0%		Variable costs	- 0	59,770.11	119,540.23
	Either…					OR					Selling price per unit =	579.26		Fixed + variable costs	400,000.00	459,770.11	519,540.23
			the Target profit		(eg, 50000)		the Target return	18.0%	(eg, 15)		Target profit =	104,347.83		Sales	- 0	459,770.11	919,540.23
						0
	0
										Breakeven analysis
4) Pricing (to determine the price of a product):											Breakeven sales in $
												=Fixed costs / Contribution Margin ratio
		Target pricing requires either field in section 3 to be filled in, for the target margin to be determined.										=Fixed costs / (1 - Variable cost ratio)
												= $400, 000 / (1 - 13%)
			Number of units you expect to sell :	1000	(eg, 1000)							= $459, 770 of sales must be achieved for turning a profit.
			Variable cost per unit	75
	Always keep in mind: it is easier to lower a price than to raise it!										Breakeven sales in units
												=Breakeven sales / Selling price
	0											= $459, 770 / $ 579
												=Fixed costs / Contribution Margin per unit
5) Sensitivity analysis (sensitivity of profit to variations in sales):												= $400, 000 / $ 504
													With the Contribution margin per unit = Selling price x (1 - Variable Cost Ratio) = $ 579 x (1 - 13%) = $ 504
		The sensitivity analysis will be performed whenever the fields in section 1 or 4 are completed.
												79 4 units must be sold to make a profit.
			(optional) Range of sensitivity	50%	(eg, 50, for 50% range around the breakeven point)
			Increments	10%	(eg, 10, for 10%-points increments)
	0									Target profit analysis
	0
											Breakeven sales in $ to reach the target profit
												= (Fixed costs + Target profit) / Contribution Margin ratio
												= ($400, 000 + $104, 348) / 87%
												= $579, 710
												Hence, the target profit represents a target return of 18% of sales.
											Breakeven sales in units to reach the target profit
												= (Fixed costs + Target profit) / Contribution Margin per unit
												= ($400, 000 + $104, 348) / $ 504
												= 100 1 units
														Income statement
																	Sales = number of units to reach the target x selling price	$579, 710
																	(-) Variable costs = BEUT x Variable Cost ratio x selling price	($75, 362)
																	(=) Contribution margin	$504, 348
																	(-) Fixed costs	($400, 000)
																	(=) Net income	$104, 348
											0
										Target return pricing
											Fixed costs				($400, 000)
											Variable costs	=Variable cost per unit x demand
												= $ 075 x 100 0 units			($75, 000)
											Total costs				($475, 000)
											Target sales needed to achieve the target margin	= Total costs / (1 - Profit margin)
												= $475, 000 / (1 - 18%)			$579, 268
											Margin in $				$104, 268
											Recommended selling price	=Target sales / demand
												= $579, 268 / 100 0 units			$ 579
											When expecting 100 0 units to be sold, given fixed costs of $400, 000, a target margin of 18% per unit and
											variable costs per unit of $ 075, the suggested price per unit is $ 579.
										Sensitivity analysis
											Sales level	Units sold	Fixed costs	Variable costs	Net income/loss	Profit margin
										1	229,885.06	397	(400,000.00)	(29,885.06)	(200,000.00)	-87.0%
										2	275,862.07	476	(400,000.00)	(35,862.07)	(160,000.00)	-58.0%
										3	321,839.08	556	(400,000.00)	(41,839.08)	(120,000.00)	-37.3%
										4	367,816.09	635	(400,000.00)	(47,816.09)	(80,000.00)	-21.8%
										5	413,793.10	714	(400,000.00)	(53,793.10)	(40,000.00)	-9.7%
										6	459,770.11	794	(400,000.00)	(59,770.11)	(0.00)	-0.0%
										7	505,747.13	873	(400,000.00)	(65,747.13)	40,000.00	7.9%
										8	551,724.14	952	(400,000.00)	(71,724.14)	80,000.00	14.5%
										9	597,701.15	1,032	(400,000.00)	(77,701.15)	120,000.00	20.1%
										10	643,678.16	1,111	(400,000.00)	(83,678.16)	160,000.00	24.9%
										11	689,655.17	1,191	(400,000.00)	(89,655.17)	200,000.00	29.0%
										12	- 0	- 0	- 0	- 0	- 0	0.0%
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										14	- 0	- 0	- 0	- 0	- 0	0.0%
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										17	- 0	- 0	- 0	- 0	- 0	0.0%
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										20	- 0	- 0	- 0	- 0	- 0	0.0%
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										24	- 0	- 0	- 0	- 0	- 0	0.0%
										25	- 0	- 0	- 0	- 0	- 0	0.0%
										26	- 0	- 0	- 0	- 0	- 0	0.0%
										27	- 0	- 0	- 0	- 0	- 0	0.0%
										28	- 0	- 0	- 0	- 0	- 0	0.0%
										29	- 0	- 0	- 0	- 0	- 0	0.0%
										30	- 0	- 0	- 0	- 0	- 0	0.0%
										31	- 0	- 0	- 0	- 0	- 0	0.0%
										32	- 0	- 0	- 0	- 0	- 0	0.0%
										33	- 0	- 0	- 0	- 0	- 0	0.0%
										34	- 0	- 0	- 0	- 0	- 0	0.0%
										35	- 0	- 0	- 0	- 0	- 0	0.0%
										36	- 0	- 0	- 0	- 0	- 0	0.0%
										37	- 0	- 0	- 0	- 0	- 0	0.0%
										38	- 0	- 0	- 0	- 0	- 0	0.0%
										39	- 0	- 0	- 0	- 0	- 0	0.0%
										40	- 0	- 0	- 0	- 0	- 0	0.0%
										41	- 0	- 0	- 0	- 0	- 0	0.0%
										42	- 0	- 0	- 0	- 0	- 0	0.0%
										43	- 0	- 0	- 0	- 0	- 0	0.0%
										44	- 0	- 0	- 0	- 0	- 0	0.0%
										45	- 0	- 0	- 0	- 0	- 0	0.0%
										46	- 0	- 0	- 0	- 0	- 0	0.0%
										47	- 0	- 0	- 0	- 0	- 0	0.0%
										48	- 0	- 0	- 0	- 0	- 0	0.0%
										49	- 0	- 0	- 0	- 0	- 0	0.0%
										50	- 0	- 0	- 0	- 0	- 0	0.0%
										51	- 0	- 0	- 0	- 0	- 0	0.0%
										52	- 0	- 0	- 0	- 0	- 0	0.0%
										53	- 0	- 0	- 0	- 0	- 0	0.0%
										54	- 0	- 0	- 0	- 0	- 0	0.0%
										55	- 0	- 0	- 0	- 0	- 0	0.0%
										56	- 0	- 0	- 0	- 0	- 0	0.0%
										57	- 0	- 0	- 0	- 0	- 0	0.0%
										58	- 0	- 0	- 0	- 0	- 0	0.0%
										59	- 0	- 0	- 0	- 0	- 0	0.0%
										60	- 0	- 0	- 0	- 0	- 0	0.0%
										61	- 0	- 0	- 0	- 0	- 0	0.0%
										62	- 0	- 0	- 0	- 0	- 0	0.0%
										63	- 0	- 0	- 0	- 0	- 0	0.0%
										64	- 0	- 0	- 0	- 0	- 0	0.0%
										65	- 0	- 0	- 0	- 0	- 0	0.0%
										66	- 0	- 0	- 0	- 0	- 0	0.0%
										67	- 0	- 0	- 0	- 0	- 0	0.0%
										68	- 0	- 0	- 0	- 0	- 0	0.0%
										69	- 0	- 0	- 0	- 0	- 0	0.0%
										70	- 0	- 0	- 0	- 0	- 0	0.0%
										71	- 0	- 0	- 0	- 0	- 0	0.0%
										72	- 0	- 0	- 0	- 0	- 0	0.0%
										73	- 0	- 0	- 0	- 0	- 0	0.0%
										74	- 0	- 0	- 0	- 0	- 0	0.0%
										75	- 0	- 0	- 0	- 0	- 0	0.0%
										76	- 0	- 0	- 0	- 0	- 0	0.0%
										77	- 0	- 0	- 0	- 0	- 0	0.0%
										78	- 0	- 0	- 0	- 0	- 0	0.0%
										79	- 0	- 0	- 0	- 0	- 0	0.0%
										80	- 0	- 0	- 0	- 0	- 0	0.0%
										81	- 0	- 0	- 0	- 0	- 0	0.0%
										82	- 0	- 0	- 0	- 0	- 0	0.0%
										83	- 0	- 0	- 0	- 0	- 0	0.0%
										84	- 0	- 0	- 0	- 0	- 0	0.0%
										85	- 0	- 0	- 0	- 0	- 0	0.0%
										86	- 0	- 0	- 0	- 0	- 0	0.0%
										87	- 0	- 0	- 0	- 0	- 0	0.0%
										88	- 0	- 0	- 0	- 0	- 0	0.0%
										89	- 0	- 0	- 0	- 0	- 0	0.0%
										90	- 0	- 0	- 0	- 0	- 0	0.0%
										91	- 0	- 0	- 0	- 0	- 0	0.0%
										92	- 0	- 0	- 0	- 0	- 0	0.0%
										93	- 0	- 0	- 0	- 0	- 0	0.0%
										94	- 0	- 0	- 0	- 0	- 0	0.0%
										95	- 0	- 0	- 0	- 0	- 0	0.0%
										96	- 0	- 0	- 0	- 0	- 0	0.0%
										97	- 0	- 0	- 0	- 0	- 0	0.0%
										98	- 0	- 0	- 0	- 0	- 0	0.0%
										99	- 0	- 0	- 0	- 0	- 0	0.0%
										100	- 0	- 0	- 0	- 0	- 0	0.0%

Breakeven & Pricing

0	0	0	0
793.7197716786	793.7197716786	793.7197716786	793.7197716786
1587.4395433571	1587.4395433571	1587.4395433571	1587.4395433571

Fixed costs

Variable costs

Fixed + variable costs

Sales

Units

Profit

Loss

400000

59770.1149425287

459770.114942529

400000

119540.229885057

519540.229885057

919540.229885058

Parameters


	Currency symbol:	$

Note: The cell reference box just above the spreadsheet on the left contains names that allow to jump swiftly from the data cells to the results cells.

Results