Breakeven Analysis in Business
Breakeven analysis is a crucial method to determine the sales level at which a company neither makes a profit nor incurs a loss. This analysis involves fixed costs, variable costs, and contribution margins to calculate the breakeven point. Through practical examples such as a dog grooming business, this concept is explained, emphasizing the importance of accurately estimating costs and pricing strategies for determining profitability.
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Presentation Transcript
BREAKEVEN ANALYSIS Exploring Business Chapter 10.6
LEARNING TARGETS I understand that breakeven analysis is a method of determining the level of sales at which the company will break even (have no profit or loss). I can define the following: fixed costs, variable costs, and contribution margin per unit. I can calculate the breakeven point in units with this formula: fixed costs divided by contribution margin per unit (selling price per unit less variable cost per unit).
BREAKEVEN ANALYSIS a method of determining the level of sales at which the company will break even (have no profit or loss)
FIXED COSTS costs that don t change when the amount of goods sold changes V ARIABLE COSTS costs that vary, in total, as the quantity of goods sold changes but stay constant on a per-unit basis CONTRIBUTION MARGIN excess revenue per unit over the variable cost per unit Sample Footer Text Sample Footer Text 4
CALCULATE BREAKEVEN POINT You re thinking of starting your own dog grooming business. You have prepared the following cost estimates for your first year of operations. Fixed Costs Salaries Rent and utilities Advertising Equipment $105,000 $36,000 $2,000 $3,000 Formula: Fixed costs divided by contribution margin per unit (selling price per unit less variable cost per unit) Variable Cost per Dog Shampoo Coat conditioner Pet cologne Dog treats Hair ribbons $2.00 $1.50 $0.75 $1.25 $0.50 Grooming Fee: $32
CALCULATE BREAKEVEN POINT Formula: Fixed costs divided by contribution margin per unit (selling price per unit less variable cost per unit) $146,000 $146,000 Fixed Costs Salaries Rent and utilities Advertising Equipment $105,000 $36,000 $2,000 $3,000 Grooming Fee: Variable Cost: Contribution Margin: $ 26.00 $ 32.00 - 6.00 $6.00 $6.00 Variable Cost per Dog Shampoo Coat conditioner Pet cologne Dog treats Hair ribbons Fixed Costs: Contribution Margin: /26 Breakeven Point: Round up to whole unit: 5,616 Round up to whole unit: 5,616 $ 146,000 $2.00 $1.50 $0.75 $1.25 $0.50 5,615.38
CALCULATE BREAKEVEN POINT Formula: Fixed costs divided by contribution margin per unit (selling price per unit less variable cost per unit) $146,000 $146,000 Fixed Costs Salaries Rent and utilities Advertising Equipment $105,000 $36,000 $2,000 $3,000 Grooming Fee: Variable Cost: Contribution Margin: $ 32.00 $ 38.00 - 6.00 $6.00 $6.00 Variable Cost per Dog Shampoo Coat conditioner Pet cologne Dog treats Hair ribbons Fixed Costs: Contribution Margin: /32 Breakeven Point: Round up to whole unit: 4,563 Round up to whole unit: 4,563 $ 146,000 $2.00 $1.50 $0.75 $1.25 $0.50 4,562.50
HOW CAN WE LOWER THE BREAKEVEN POINT? Reduce Fixed or Variable Costs Raise Grooming Fee
BREAKEVEN ANALYSIS Beth has dreams of opening a gourmet cupcake store. She does a break-even analysis to determine how many cupcakes she ll have to sell to break even on her investment. She s done the math, so she knows her fixed costs for one year are $10,000 and her variable cost per unit is $.50. She s done a competitor study and some other calculations and determined her unit price to be $6.00. What is her breakeven point? Break-even quantity = Fixed costs / (Sales price per unit Variable cost per unit)
BREAKEVEN ANALYSIS What is Beth s breakeven point for her gourmet cupcake store? Break-even quantity = Fixed costs / (Sales price per unit Variable cost per unit) $10,000/($6-$0.50)=1,819 cupcakes 1,819 cupcakes
How can I apply this concept of breakeven analysis to my life or future plans?
