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

Breakeven Analysis Part 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. EGR 403 - The Big Picture.

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

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  1. Breakeven AnalysisPart 1Click 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 EGR 403 - Cal Poly Pomona - SV3

  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 EGR 403 - Cal Poly Pomona - SV3

  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 EGR 403 - Cal Poly Pomona - SV3

  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 EGR 403 - Cal Poly Pomona - SV3

  6. Breakeven Volume (cont’d) • Find x such that: Price/unit * x = Fixed + VC/unit * x • Therefore: xBE = Fixed Cost / (Price/unit - VC/unit) • If actual volume is < xBE , you have a loss • If actual volume is > xBE , you have a profit EGR 403 - Cal Poly Pomona - SV3

  7. Fixed CostFixed cost is the the same, regardless of volume EGR 403 - Cal Poly Pomona - SV3

  8. Variable Cost + Fixed CostTotal Cost goes up with volume because Variable Cost increases EGR 403 - Cal Poly Pomona - SV3

  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 EGR 403 - Cal Poly Pomona - SV3

  10. ProfitAbove the BE point, the difference between the Revenue and Total Cost lines represents profit EGR 403 - Cal Poly Pomona - SV3

  11. LossIf volume is below the BE point, the difference between the lines represents a loss EGR 403 - Cal Poly Pomona - SV3

  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 EGR 403 - Cal Poly Pomona - SV3

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