Breakeven Analysis
Quantitative Tool for Evaluating
Alternatives
Breakeven Analysis
• Organizations face Variables Costs (VC).
• Variable Costs (VC) change with the volume of production, e.g. cost of
materials or labor.
• Organizations face Fixed Costs (FC).
• Fixed Costs (FC) do not change with volume of production and would
be incurred even if no products were manufactured or sold, e.g. Utilities,
Advertising and Sales Expenses, Machinery.
• Price (P) per Unit is the revenue obtained per unit.
• Unit Contribution or Margin per Unit is the difference between price per
unit and variable cost per unit, i.e.
• Unit Contribution = P per unit – VC per unit
• Breakeven volume is found by dividing the total fixed costs by the unit
contribution
• Breakeven Volume (Units) = Total Fixed Costs
• Unit Contribution
Break Even Analysis
• Breakeven occurs when Total Costs = Total
Revenues
• Total Costs = Fixed Costs + Variable Costs
• If TC are greater than TR than loss is incurred.
• If TR are greater than TC than profit is incurred.
• Typically TR are less than TC at beginning
stages of production
• Raising prices will reduce BEP.
• Lowering prices will increase BEP.
Diaper Rash Strategy Breakeven Analysis
400,000 Doctors & Nurses (11% in CA or 44,000)
Cost of List $
Mailing Cost
Cost of Samples
Demonstrations (# per
group)
Advertising Journal A (#)
Advertising Journal B
Conventions (#)
Total Promotional Costs $
BEP
Special Occasion Strategy Breakeven Analysis
1,000,000 Mothers in CA (1,000,000 / 1,000 = 1,000)
Cost of List $
Mailing Costs
Cost of Samples
Cost of Advertising
Total Promotional Costs $
BEP
Head On Strategy Breakeven Analysis
Promotional Costs $
BEP