Breakeven Analysis Part 1 Click here for Streaming Audio To Accompany Presentation (optional)

1
Breakeven AnalysisPart 1 Click here for
Streaming Audio To Accompany Presentation
(optional)

• EGR 403 Capital Allocation Theory
• Dr. Phillip R. Rosenkrantz
• Industrial Manufacturing Engineering Department
• Cal Poly Pomona

2
EGR 403 - The Big Picture

• Framework Accounting Breakeven Analysis
• Time-value of money concepts - Ch. 3, 4
• Analysis methods
• Ch. 5 - Present Worth
• Ch. 6 - Annual Worth
• Ch. 7, 8 - Rate of Return (incremental analysis)
• Ch. 9 - Benefit Cost Ratio other techniques
• Refining the analysis
• Ch. 10, 11 - Depreciation Taxes
• Ch. 12 - Replacement Analysis

3
Introduction

• Break even (BE) analysis helps engineers
  understand the big picture
• Knowing how your project or assignment affects
  profitability can help you sell your projects to
  upper management
• Understanding BE analysis illustrates the value
  of engineers to the company

4
Recall from the P L Statement

• Fixed costs - do not vary (e.g., lease costs,
  rent, insurance)
• Variable costs - vary with volume of production
  (e.g., labor, materials, supplies, rent, etc.)
  Overhead can also be applied here as a variable
  expense or burden rate.
• Profit Equation -
• Profit Revenue - Expenses

5
Breakeven Volume

• Total Variable Cost (VC) is a function of volume
  (x) of units sold.
• Total VC Variable Cost/unit x
• Total Cost Fixed Cost Total VC
• Revenue is also a function of units sold
• Revenue Price/unit x
• Breakeven Volume is the number of units you need
  to sell so that
• Revenue Total Cost

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Breakeven Volume (contd)

• Find x such that
• Price/unit x Fixed VC/unit x
• Therefore
• xBE Fixed Cost / (Price/unit - VC/unit)
• If actual volume is lt xBE , you have a loss
• If actual volume is gt xBE , you have a profit

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Fixed CostFixed cost is the the same, regardless
of volume
8
Variable Cost Fixed CostTotal Cost goes up
with volume because Variable Cost increases
9
Total Revenue is based on volume and selling
price/unit.Where the Revenue and Total Cost
lines intersect is the Break Even (BE) Point.
That volume is the BE Volume
10
ProfitAbove the BE point, the difference between
the Revenue and Total Cost lines represents profit
11
LossIf volume is below the BE point, the
difference between the lines represents a loss
12
Break Even Analysis

• Collect financial and cost information to
  determine fixed and variable costs
• Fixed costs
• Variable cost/unit (labor, materials, overhead)
• Estimate Selling Price per unit from marketing
  analysis and market testing
• Determine BE volume and compare to estimated
  sales
• If estimated sales volume is not above the BE
  volume, make adjustments