LECTURE SIX

Breakeven Analysis
Always the Manager ask “ When I Breakeven ? “
The answer is when { the revenue R = the total cost Tc }
Breakeven Is a decision tool related { R , Tc , Profit , and Volume }
Revenue R

Profit = R - Tc

Fc= { CR , Lease, Tax &Insurance, salary ,

Tc =Fc + Vc fuel , elec , security, others ...}

Symbols used :-
R = Reveue $
Fc = Fixed cost $/year
Vc = Total variable cost $
Tc = Total costs $
P = Profit $
Q = Production size items or units
QBE = Production size at breakeven point item or units
CM = Contribution Margin $
CMU = Contriburtion Margin per unit $/item .
CM% = Contribution Margin as percentage %.

And ;
r = selling price $/item .
v = varible cost $/item .
Equations used in analysis :

1. Total Revenue R= r .Q $ ............[1]

2. Total Variable cost Vc = v . Q $ ............[2]
3. Total cost Tc = Fc + Vc = Fc + v .Q $ .............[3]
4. Profit (net) P = R - Tc = r.Q - [ Fc+ v.Q ] Or
P = [r – v ]Q - Fc $ ..............[4]

5. Contribution Margin CM = [r –v ] .Q $ .............[5]

6. Also from Eq. 4 P = CM - Fc $ .............[6]
7. CMU = CM/ Q = [ r – v ] $ .............[7]
8. CM% = CM/ R = [r – v ]Q / r Q
= [r - v]/ r ............[8]

9. Annual capacity = No. Items /hr.* No. hr /day * No. days /yeras
[Items/year ] .............[9]
 Breakeven R
$ point P
Revenue
T Cost Profit
Tc
Vc
R=Tc

Fc Fc
Loss

Annual Capacity

Q=QBE Q
Items

The chart called CVP chart

when production start the maneger try to reach the breakeven
point fastly to begin making a profit when Q = QBE {or when
the revenue R equal the total cost Tc } ; so

R = Tc (only at QBE ) r.QBE = Fc + v.QBE

QBE = Fc / [ r – v ]
It is clear that at QBE the profit P is zero , and the contribution
margin CM is equal to Fc .

How to Draw VP chart

This chart is drawn by take only the profit P , and
CM , and the volume Q .
 $ CM = [r – v] .Q
Profit
CM

Fc P =[r – v].Q - Fc

QBE Q items

- Fc

This is called PV chart

Example :
Amanual production machine ( initial cost $ 30 K , 6 years useful
life , $ 2 K salvage value ) .Its production rate is 20 item/hour of
certain mechanical part .
Informations :

Cost of labor is 10 $ /hr .

Cost of raw material is 0.8 $/item .
Lease of space is $ 1000 per year, and tax & insurance 550 $/year
Other overheads is 530 $/year .
The machine estimated to operate 6 hr/day for 250 day / year .
Each unit produced can be sold by 2 $ /item .

Required
1. Make complete Breakeven analysis ,draw CVP , and VP charts ,
and fine the annual profit of this mahine at i =20 % .
2. If the the sellinf price increased 10% what is the new Breakeven
Point , and the new profit ?
Solution :
Aw(20%) = -3K(A/p,20%,6) + 2K(A/F ,20%,6) = $ 8.82 K/year the capital

recovery of the machine .

Selling price r = 2 $/item .

Variable cost v $/item = labour cost $/item + raw material cost $/item
= (10 $/hr ) /(20 item/hr) + 0.8 $/item = 1.3 $/item

Fc = AW + lease + Tax + overheads = 8.82 + 1 + 0.55 + 0.53 = $ 10.9 K/year

QBE = Fc / (r – v) = 10900 /(2 – 1.3) = 15571 item the Breakeven point .

Revenue R at QBE is = r . QBE = 2 * 15571 = $ 31142

this is also the total cost at QBE
.

Annual production capacity = production rate * no. Of hrs in a year

= 20 Item /hr * 6hr/day * 250 day /year
Profit (Annually ) = R – Tc = r.Q - ( Fc + v . Q )
= 2* 30000 - (10900 + 1.3 * 30000)
= $ 10100 /year the net profit.
$ i= 20% S.V= 2K
60000
R
P=10100 0 6

Tc
P=30 K Cash flow
31142
10900

15571 30000 Q
CVP chart

Annual Revenue = 2 * 30000 = 60000 $

CM = (r-v) .Q = (2-1.3) * 30000 = $ 21000

 CMU = CM /Q = (r-v) .Q /Q = (r-v ) = 2-1.3 = 0.7 $/item
$
CM % = (r – v)/r = (2 – 1.3)/2 = 35 % P
CM CM P

To draw VP chart We have :

P = (r - v) .Q – FC QBE Q
CM = (r – v) .Q Fc =10900
VP chart
Question

If r is increased 10 % then the new r will be :

2 +0.1(2) =2.2 $/item the new selling price .
The new QBE = 10900 /(2.2 -1.3 ) = 12111 item .

New annual profit will be = 2.2 *30000 - ( 10900 + 1.3 * 30000)

= 16100 $
Home work

Fill in the blank for each of the folllowing :

Case R Vc Fc Tc P CM CM%
1 500 800 1200
2 2000 300 200
3 1000 700 1000
4 1500 300 40%

Solution :
Case (1) : Tc = Fc + Vc 800= Fc + 500 Fc= 300
P = R - Tc 1200 = R – 800 R = 2000
CM = (r - v) .Q = R – Vc = 2000 - 500 CM= 1500
CM% = CM / R = 1500/2000 CM%= 75%
LECTURE is Finished

Thank you