Post on 19-Feb-2018
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 1/38
Break-even Analysis
Jibran Hussain
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 2/38
In economics & business, specifically cost accounting,
the break-even point (BEP) is the point at which cost
or expenses and revenue are equal: there is no net loss
or gain, and one has "broken even.“
A profit or a loss has not been made, although
opportunity costs have been "paid," and capital has
received the risk-adjusted, expected return.
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 3/38
BREAKEVEN ANALYSIS
TOTAL COST CURVES:
COSTS
AVERAGE COST CURVES:
COSTS
FIXED COSTS
VARIABLE COSTS
TOTAL COSTS
QUANTITY
QUANTITY
AVERAGE TOTAL COSTS
AVERAGE VARIABLE COSTS
AVERAGE FIXED COSTS
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 4/38
Break - Even Analysis
B.E. Point = Fixed CostsSelling prie!unit - "ariable Cost!unit
BREAKEVEN POINT:
TR = TC
TR = VC + FC
(UNITS)($/UNIT) = (UNITS)($/UNIT) + FC
PRICE COST
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 5/38
#$y alulate break-even%
Ali can hire an icecrea! "an #r an a#%ernn
a% a &'!!er The "an hire ill *e R&,, an-
%he c&% # crne%&. ice crea! e%c
,0 0er ice crea!
Ali %hin1& a &en&i*le &ellin2 0rice ill *e R&,
A% %hi& 0rice. h !an3 icecrea!& !'&% he &ell % c"er hi& c&%&4
Calc'la%in2 %hi& ill hel0 Ali % -eci-e i# %he i-ea
i& r%hhile
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 6/38
I-en%i#3in2 %he *rea1e"en 0in%
Loss
Profit
Brea!e"e# $oi#t
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 7/38
Applying t$e &or'ula
Fixed costs
(Selling price per unit minus variable cost per unit)
A%i : £100
(£1.50 – 50p)= &''
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 8/38
Break - Even Analysis ()evenues*
N'!*er # 'ni%& 0r-'ce- an- &l-
$ # Sale&
an- C&%&
T%al Re"en'e
5ineThe &l0e # %he
re"en'e line i&
-e%er!ine- *3 %he
0rice %ha% 3' &e%
#r 3'r 0r-'c%
r &er"ice
6
$6,
$,
Sale& re"en'e
hen 0rice 0er
'ni% i& $,,,
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 9/38
N'!*er # 'ni%& 0r-'ce- an- &l-
$ # Sale&
an- C&%&
T%al Re"en'e
5ine +$e slope o& t$erevenue line isdeter'ined by t$eprie t$at you set&or your produtor servie.
6
$6,
$,Sales revenue,$en prie perunit is .//.
Brea1 E"en Anal3&i& (Re"en'e&)
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 10/38
Break Even )evenue C$art
$ # Sale&
an- C&%&
7 # 'ni%& 0r-'ce- an- &l-
T%alRe"en'e
T%al C&%&
Fi8e- C&%&
Brea1 E"en Pin%
in Uni%&
TR = TC
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 11/38
• PROBLE(:
– SELECT A PRICE OF )&' OR )&* FOR PRODUCT +X,
• FACTS: – F01E2 C3S+ = 4/5///
– "A)0AB6E C3S+ PE) 780+ = 4.//
– 2E9A82 0S 60:E6; +3 BE<
• = >?5/// 780+S S362 @ >/.//
• = >5/// 780+S S362 @ >.//
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 12/38
BREAKEVEN ANALYSIS EXA(PLE
DE(AND CURVE:
&-
&'
-
'
' - &' &- QUANTITY .K/
PRICE
DE(AND:&01''' UNITS 2 )&'
&*1''' UNITS 2 )&*
TR .2 )&'/ 3 &' X &01''' 3 )&0'1'''TR .2 )&*/ 3 &* X &*1''' 3 )&001'''
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 13/38
CONTRIBUTION TO FIXED COST PROCESS:
2 )&'4'' 2 )&*4''
)5'1''' 6)04'' 3 &-1''' UNITS )5'1''' 6 )54'' 3 &'1''' UNITS
DE(ANDED UNITS:
&01''' UNITS &*1''' UNITS
BREAKEVEN GREATER T7AN BREAKEVEN LESS T7ANDE(AND ! LOSE (ONEY DE(AND ! (AKE PROFIT
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 14/38
Break-even analysis<Break-even point
• Ali &ell& a 0r-'c% #r $, an- i% c&% $ % 0r-'ce
Uni% Varia*le C&% (UVC) an- ha& #i8e- c&% (FC) #
$6.,,, 0er 3ear
• 9 !'ch ill he nee- % &ell % *rea1e"en4
• 9 !'ch ill he nee- % &ell % !a1e $,,,4
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 15/38
Algebrai approa$<Basi euation
)evenues "ariable ost Fixed ost = 30
(7SP x * (7"C x * FC = 30
>/ - 5/// = /.// = 5///
= 5///
#$at uantity de'and ,ill earn >5///%>/ - - 5/// = >5///
= 45///
= 5//
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 16/38
Drap$ial analysis
Dollars
/5///
4/5///
/5///
?/5///
/5///
/5///
>/5/// Break-
even point /
>/// /// /// ?/// /// 4///
uantity
T%al Re"en'e 5ine
T%al C&% 5ine
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 17/38
Drap$ial analysis<Cont.
Dollars
/5///
4/5///
/5///?/5///
/5///
/5///
>/5/// Break-even point
/
>/// /// /// ?/// /// 4///
uantity
T%al C&% 5ine
T%al Re"en'e 5ine
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 18/38
Break-even Analysis< Co'paring diGerent variables
• Co'pany 1; $as to $oose bet,een t,o'a$ines to pur$ase. +$e selling prie is>/ per unit.
• 9a$ine A< annual ost o& /// ,it$ perunit ost ("C* o& .
• 9a$ine B< annual ost o& I/// ,it$ perunit ost ("C* o& .
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 19/38
Break-even analysis<Co'parative analysis Part >
• 2eter'ine break-even point &or 9a$ine Aand 9a$ine B.
• #$ere< " = FC
SP - "C
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 20/38
Break-even analysis<
9a$ine A<
v = 5///
>/ -
= 4// units
9a$ine B<
v = I5///
>/ - = >/// units
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 21/38
Part >< Co'parison
• Co'pare t$e t,o results to deter'ine
'ini'u' uantity sold.
• Part > s$o,s<
– 4// units are t$e 'ini'u'.
– 2e'and o& 4// you ,ould $oose
9a$ine A.
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 22/38
Part < Co'parison
Fin-in2 0in% # in-i##erence *e%een achine A an- achine B
ill 2i"e %he ;'an%i%3 -e!an- re;'ire- % &elec% achine B "erachine A
achine A = achine B
FC + VC= FC + VC
$<.,,, + $ = $>.,,, + $6
$< = $.,,,
= ??@
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 23/38
Part < Co'parisonCont.
• Knin2 %he 0in% # in-i##erence e ill ch&e:
• achine A hen ;'an%i%3 -e!an-e- i& *e%een ?,,
an- ??@
• achine B hen ;'an%i%3 -e!an-e- e8cee-& ??@
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 24/38
Part < Co'parisonDrap$ially displayed
Dollars
>5///
>I5///
>5///
>5///
5///
45///
5////
// >/// >// /// // ///
uantity
achine A
achine B
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 25/38
Part < Co'parisonDrap$ially displayed Cont.
Dollars
>5///
>I5///
>5///
>5///
5///
45///
5/// Point o& indiGerene
/
// >/// >// /// // ///
uantity
achine A
achine B
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 26/38
Break-Even Analysis
C&%&/Re"en'e
O'%0'%/Sale&
Ini%iall3 a #ir!
ill inc'r #i8e-
c&%&. %he&e -
n% -e0en- n
'%0'% r &ale&
FC
A& '%0'% i&
2enera%e-. %he#ir! ill inc'r
"aria*le c&%&
%he&e "ar3 -irec%l3
i%h %he a!'n%
0r-'ce-
VCThe %%al c&%&%here#re
(a&&'!in2
acc'ra%e
#reca&%&) i& %he
&'! # FC+VC
TC T%al re"en'e i&-e%er!ine- *3 %he
0rice char2e- an-
%he ;'an%i%3 &l-
a2ain %hi& ill *e
-e%er!ine- *3
e80ec%e- #reca&%
&ale& ini%iall3
TR The ler %he 0rice. %he le&&
&%ee0 %he %%al
re"en'e c'r"e
TR
The Brea1e"en 0in%
cc'r& here %%alre"en'e e;'al& %%al
c&%& %he #ir!. in
%hi& e8a!0le 'l-
ha"e % &ell %
2enera%e &'##icien%
re"en'e % c"er i%&
c&%&
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 27/38
Break-Even AnalysisC&%&/Re"en'e
O'%0'%/Sale&
FC
VCTCTR (0 = 6)
I# %he #ir! ch&e% &e% 0rice hi2her
%han 6 (&a3 <)
%he TR c'r"e
'l- *e &%ee0er
%he3 'l- n%
ha"e % &ell a&
!an3 'ni%& %
*rea1 e"en
TR (0 = <)
6
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 28/38
Break-Even Analysis
C&%&/Re"en'e
O'%0'%/Sale&
FC
VCTCTR (0 = 6)
I# %he #ir! ch&e% &e% 0rice& ler
(&a3 ) i% 'l-
nee- % &ell !re
'ni%& *e#re
c"erin2 i%& c&%&
TR (0 = )
<
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 29/38
Break-Even Analysis
C&%&/Re"en'e
O'%0'%/Sale&
FC
VCTC
TR (0 = 6)
5&&
Pr#i%
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 30/38
Break-Even Analysis
C&%&/Re"en'e
O'%0'%/Sale&
FC
VCTC
TR (0 = 6)
6
A&&'!e
c'rren% &ale&
a% 6
ar2in # Sa#e%3
Margin of
safety &h&
h #ar &ale& can#all *e#re l&&e&
!a-e I# =
,,, an- 6 =
>,,. &ale& c'l-
#all *3 >,, 'ni%&
*e#re a l&&'l- *e !a-e
TR (0 = <)
<
A hi2her 0rice
'l- ler%he *rea1
e"en 0in%
an- %he
!ar2in #
&a#e%3 'l-i-en
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 31/38
C&%&/Re"en'e
O'%0'%/Sale&
FC
VC
TR
9i2h ini%ial FCIn%ere&% n -e*%
ri&e& each 3ear
FC ri&e %here#re
FC
5&&e& 2e%
*i22er
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 32/38
Break-Even Analysis
• )e'e'ber<
• A $ig$er prie or lo,er prie does not'ean t$at break even ,ill never be
rea$edK• +$e BE point depends on t$e nu'ber
o& sales needed to generate revenue
to over osts t$e BE $art is 83+ti'e relatedK
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 33/38
Exerise ><
• Co'pany ABC sell ,idgets &or / aunit.
• +$eir Lxed ost is>//5///
• +$eir variable ost is >/ per unit.
• #$at is t$e break-even point using t$ebasi algebrai approa$%
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 34/38
Exerise ><Ans,er
)evenues "ariable ost - Fixed ost = 30
(7SP x * (7"C x * FC = 30 / - >/ >//5// = /.//
/ = >//5///
= 5///
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 35/38
Exerise <• Co'pany 2EF $as a $oie o& t,o
'a$ines to pur$ase. +$ey bot$ 'aket$e sa'e produt ,$i$ sells &or >/.
• 9a$ine A $as FC o& 5/// and a per unitost o& .
• 9a$ine B $as FC o& >5/// and a perunit ost o& >.
• 7nder ,$at onditions ,ould you selet9a$ine A%
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 36/38
Exerise <Ans,er
Step >< Break-even analysis on bot$ options.
9a$ine A<
v = 5///
>/ - = >/// units
9a$ine B<
v = >5///
>/ - >
= >44 units
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 37/38
Exerise <Ans,er Cont.
9a$ine A = 9a$ine B
FC M "C = FC M "C
5/// M = >5/// M >
? = >/5///
= //
• 9a$ine A s$ould be pur$ased i&expeted de'and is bet,een >/// and// units per year.
7/23/2019 BE and timevalue of money.pptx
http://slidepdf.com/reader/full/be-and-timevalue-of-moneypptx 38/38
Su''ary<• Break-even analysis an be an eGetive
tool in deter'ining t$e ost eGetivenesso& a produt.
• )euired uantities to avoid loss.
• 7se as a o'parison tool &or 'aking adeision.