HBS Toolkit LICENSE AGREEMENT

HBS Toolkit License Agreement

Harvard Business School Publishing (the Publisher) grants you, the

individual user, limited license to use this product. By accepting and
using this product, you agree to the terms of service described below.

Terms
You accept that this product is intended for your use, and you will not
duplicate in any form or manner, electronic or otherwise, copies of this
product nor distribute this product to anyone else.

You recognize that the product and its content are the sole property of the
Publisher, and that we have copyrighted the product.

You agree that the Publisher is not responsible for any interruption of
service or malfunction that is a consequence of the Internet, a service
provider, personal computer, browser or other software or hardware
components. You accept that there is no guarantee that this product is
totally error free. You further understand and accept that the Publisher
intends to provide reliable information but does not guarantee the accuracy
or completeness of any information, and is not responsible for any results
obtained from the use of such information.

This license is effective until terminated, when the license or subscription

period ends without renewal, or when you destroy this product and any
related documentation. The Publisher may terminate your license without
notice if you fail to comply with the conditions set forth in this
agreement, and may pursue any other legal recourse.

Copyright © 1999 President and Fellows of Harvard College

 Break-Even Analysis INTRODUCTION

Contents
Introduction: This sheet
Analysis: Entry screen for fixed and variable costs, pricing/contribution,
and volume information
Chart: Displays break-even point, variable costs, fixed costs,
and contribution in dollars and units
Table: Output data which generates break-even chart

Overview
Managers often want to know the production level where profits earned from a product cover
the cost of resources used to create it. Break-even analysis is how we determine this level.
The point at which total sales revenues covers the costs of committed resources is called the
break-even point. In addition to knowing the break-even point, managers may also want to
know the point at which sales volume reaches a pre-set target-profit level.

This tool helps you perform both of these calculations. The first is break-even analysis
where your goal is to determine how many units you must sell to recover all of your fixed
costs. The second is target-profit analysis where your goal is to determine how many
units you must sell to reach a pre-defined profit level. The difference between the two is
that at break-even your target-profit is zero, whereas when you specify a target-profit
that is greater than zero, you are setting your goal above the break-even point.

Directions
You may want to print these directions as a reference guide for this tool.

These directions provide a general introduction to the contents of each worksheet

in the tool. For more detailed directions place your mouse above the red celltips
located throughout the tool. See this example -->

Analysis: The analysis page is your primary input sheet. Here you will
tell the tool what type of analysis you want to perform, input
the data required to perform calculations, and view some of
the output of those calculations.

Chart: The chart sheet is one of the two report sheets in this tool.
Here you can visually measure your break-even or target-profit
level along with total fixed and variable costs. If you chose to
calculate the number of months before you reach break-even
or target-profit those numbers will be reported here.

Table: The table sheet is the second output report and contains the
data used to generate the break-even/target-profit chart. This
includes ten data points on either side of the break-even/target-profit
point.

Important Note: This tool is based on a Microsoft Excel worksheet. Any changes
you make to this file are permanent once you save the file. To
re-use this tool as a template for break-even calculations, always
open a new copy of the tool and save your results with a
different file name.

To start using the tool, remove the sample data from the tool using the Show/Hide
Sample Data option under the HBS Menu
 Break-Even Analysis INTRODUCTION

Sample Problem

A company wants to begin selling a new pair of hand-held pliers in the upcoming fiscal
year. They want to know how many hand-held pliers they will have to sell in order to
break-even on this investment in materials and equipment. They received the following
data from the chief financial officer:

Fixed costs
Metal molding machine: $100,000
Plastic grip molder: $25,000
Sander: $5,000

Variable costs (per unit)

Packaging material: $1.00
Raw material $1.00
Grip material: $0.50
Shipping $0.50

The marketing department estimates that they can sell their new pliers for
$15.00 per unit. They further project that they will average 1200 units
per month.

The goal is that they will break-even and start to earn a profit within
the first year. His target-profit level for the end of the first fiscal year is
$100,000.

Note About Using Internet Explorer

The default setting in Internet Explorer is to open these tools in the Explorer application
insteadof Excel. We recommend against this and provide directions in the Help section of
the HBSToolkit web site to change this default behavior.

HBS Menu
Show/Hide Sample Data:
Show Calculator:
Show/Hide Celltips:
Print Sheet with Celltips:
Set Zoom:
Visit Web Links:
About HBS Toolkit:
Displays or removes sample entries
Launches Windows calculator
Toggles in/out red Celltips in documented cells
Prints Celltip documentation on current sheet
Provides quick access to 80%, 100%, and 125% zoom levels
Links to HBS Toolkit website, Toolkit Glossary, and Toolkit
Feedback, as well as HBS and HBS Publishing web sites
Launches the about box for the HBS Toolkit

Jon B. DeFriese MBA `00 and Chad Ellis, MBA `98 developed this software under the
supervisionof Professor Steven Wheelwright as the basis for class discussion rather than
to illustrate eitherthe effective or ineffective handling of an administrative situation.

Copyright © 1999 President and Fellows of Harvard College

 Break-Even Analysis ANALYSIS

Solve for: Number Units Product Name:

● Break-Even Point
Target Profit $0.00

Fixed Costs Variable Costs per Unit

Item 1 $100,000.00 Item 1 $1.00

Item 2 $25,000.00 Item 2 $1.00
Item 3 $5,000.00 Item 3 $0.50
Item 4 Item 4 $0.50
Item 5 Item 5
Item 6 Item 6
Item 7 Item 7
Item 8 Item 8
Fixed Costs: $130,000.00 Var. Costs/Unit: $3.00

Pricing and Contribution Volume

Sa...
Unit Price: $15.00 Break-Even Volume: 10,833
Unit Contribution Margin: $12.00 Expected Sales Per Month: 1,200

● Units Dollars

Notes:

Copyright © 1999 President and Fellows of Harvard College

sample1

100000
25000
5000

15

Page 5
 sample1

1 1

Page 6
sample1

1
1
0.5
0.5

1200

Page 7
sample1

Page 8
current1

Page 9
 current1

1 1

Page 10
current1

Page 11
 Break-Even Analysis BREAK-EVEN
CHART

$350,000

$300,000

$250,000

$200,000
Dollars

$150,000

$100,000

$50,000

$0
0 83 167 250 33 3 4 17 5 00 5 83 666 750 8 33 9 16 000 083 166 250 333 416 49 9 583 666
10 2 3 4 5 6 7 8 9 10 11 13 14 15 16 17 18 19 20 21

Number of Units
Total Variable Costs Total Fixed Costs Total Sales Revenues

Units Required for Break-Even: 10,833

Dollar Sales Required for Break-Even: $162,500.00
Variable Costs Per Unit: $3.00
Total Variable Costs: $32,499.00
Total Fixed Costs: $130,000.00
Months to Break-Even: 9.0

Copyright © 1999 President and Fellows of Harvard College

 Break-Even Analysis BREAK-EVEN
TABLE

Number of Units Total Fixed Costs Total Variable Costs Total Sales Revenues
0 $130,000 $0 $0
1083 $130,000 $3,250 $16,250
2167 $130,000 $6,500 $32,499
3250 $130,000 $9,750 $48,749
4333 $130,000 $13,000 $64,998
5417 $130,000 $16,250 $81,248
6500 $130,000 $19,499 $97,497
7583 $130,000 $22,749 $113,747
8666 $130,000 $25,999 $129,996
9750 $130,000 $29,249 $146,246
10833 $130,000 $32,499 $162,495
11916 $130,000 $35,749 $178,745
13000 $130,000 $38,999 $194,994
14083 $130,000 $42,249 $211,244
15166 $130,000 $45,499 $227,493
16250 $130,000 $48,749 $243,743
17333 $130,000 $51,998 $259,992
18416 $130,000 $55,248 $276,242
19499 $130,000 $58,498 $292,491
20583 $130,000 $61,748 $308,741
21666 $130,000 $64,998 $324,990

Copyright © 1999 President and Fellows of Harvard College