FINANCIAL PLANNING

By
Dr. M.Abd Elnaby
Break Even Point
• Introduce the aims and objectives for the session.
• In groups define fixed, variable costs and revenue using
show me boards.
• Explain break even analysis and give examples of its importance.
• Discuss how to calculate break even and explain methods.
• Calculate the breakeven point and explain the methods.
• Discuss your calculations with the class.
• Complete a Kahoot quiz on Break even formulas.
• Calculate profit and loss and the breakeven point using two examples.
• Discuss your break even, profit and loss findings with the class.
• Answer the breakeven revision questions.
• Recap the aims and objectives for the session.
Task:

What are fixed/ variable costs?

What is revenue and what is profit formulas?

Show me boards.

Time: 10 mins
Reach a point in a business venture when the
profits are equal to the costs.
To gain an understanding of calculating break-even we will use the
example of a young entrepreneur wishing to start up a business
delivering packages of fruit and veg.

He knows that the last local shop in his area closed last year.
Sensibly, he has carried out market research which indicates that
there will be a good level of demand, but before he begins he needs
to know how profitable the business might be. He has also fully
researched the costs of starting up as a deliveryman and the costs of
purchasing supplies.
The costs he has researched are as follows:

• cost of delivery van purchase £6000;

• insurance and road tax £100 per month;

• petrol £10.00 per day;

• average cost of fruit and veg box £5.00;

• Salaries - £1150 per month;

• loan repayment £500 per month for twelve months.
His market research indicates that the fruit and veg boxes will
have an average sales price of £9.00.

The question then is how many boxes will he need to sell to

cover all his costs, i.e. to break even?

He decides to calculate break-even on a monthly basis.

Fixed costs
Variable costs
Loan - £500 per month
Petrol costs - £250 per month £5.00 per box
Insurance/road tax - £100 per month
Salaries - £1150 per month Sales revenue

Total fixed costs - £2000 per month £9.00 per box

Calculating break-even point using the contribution method.

Once we have calculated costs, the next step in calculating

break-even output or sales is finding out how much
contribution each item sold produces for the business.
Every product made has a variable cost and a selling price
(which must obviously be higher).

The difference between the selling price per unit and the
variable cost per unit is known as the CONTRIBUTION towards
covering the business’s fixed costs.
There is a simple formula for calculating break-even output.

Break-even output = Fixed costs

Contribution per unit.

Contribution per unit = Selling price – Variable costs (per

unit)
Break-even output = Fixed costs
Contribution per unit.

Contribution per unit = Selling price – Variable costs (per unit)

Break even in units = £2,000

£9 - £5

Break even in units = £2,000 / 4

Break even in units = 500 boxes

We can now see that to break even our deliveryman must
sell 500 fruit and veg boxes per month.

• If he sells more than 500 boxes he will make a profit.

• If he sells less than 500 boxes he will make a loss.

At break-even point the

total contribution equals
the total fixed costs.
Break-even analysis also allows us to calculate the profit or
loss a business will make at different levels of output.

This will always be important – after all our grocery seller may
wish to go into business only if his profits are likely to be at a
certain level.

First of all calculate the

break-even output, in the
above case we know it is
500 boxes per month.
As a result of his market research he believes that he can sell 650
boxes a month.

He now wants to know what his profit will be at that level of

sales. To find out how much profit will be made, we again use the
idea of contribution.
In this case predicted sales are 650. Break-even sales are 500.

Profit per sales = Predicted sales – Break even sales x

Contribution per unit

Profit per sales = 650 – 500 x £4

Profit per sales = 150 x £4
Profit per sales = £600

His profits per month on sales of 650 boxes will be £600.

1) What is the break even point?

2) What is the break even point formula – Draw on board.

3) Calculate the break even point when fixed costs are £1,000, variable
Costs are £3.00 per unit and the selling price is £13.00 per unit.

4) How can you calculate profit by using break even?

5) Calculate the profit made if 150 units were sold?

• Introduce the aims and objectives for the session.
• In groups define fixed, variable costs and revenue using
show me boards.
• Explain break even analysis and give examples of its importance.
• Discuss how to calculate break even and explain methods.
• Calculate the breakeven point and explain the methods.
• Discuss your calculations with the class.
• Complete a Kahoot quiz on Break even formulas.
• Calculate profit and loss and the breakeven point using two examples.
• Discuss your break even, profit and loss findings with the class.
• Answer the breakeven revision questions.
• Recap the aims and objectives for the session.
 Terminal Learning Objective
• Action: Calculate breakeven point in units and revenue dollars
• Condition: You are a cost advisor technician with access to all
regulations/course handouts, and awareness of Operational
Environment (OE)/Contemporary Operational Environment (COE)
variables and actors.
• Standard: With minimum of 80% accuracy:
1. Identify assumptions underlying breakeven analysis
2. Identify key variables in breakeven equation from scenario
3. Define contribution margin
4. Enter relevant data into macro enabled templates to calculate Breakeven
Points and graph costs and revenues
© Dale R. Geiger 2011 20
 What is Breakeven?
• The Point at which Revenues = Costs
• Revenues above the breakeven point result in profit
• Revenues below the breakeven point result in loss
• May be measured in units of output or revenue dollars
• Represents a “Reality Check”
• Is this level of revenue reasonable?
• If not, what actions would yield a reasonable breakeven point?

© Dale R. Geiger 2011 21

 Review: Cost Terminology
• Fixed Costs - Costs that do not change in total with the volume
produced or sold
• Variable Costs - Costs that change in direct proportion with the
volume produced or sold
• Mixed Costs - A combination of fixed and variable costs
• Semi-variable Cost - Costs that change with volume produced, but
not in direct proportion

© Dale R. Geiger 2011 22

 Review: Cost Terminology
• Fixed Costs - Costs that do not change in total with the volume
produced or sold
• Variable Costs - Costs that change in direct proportion with the
volume produced or sold
• Mixed Costs - A combination of fixed and variable costs
• Semi-variable Cost - Costs that change with volume produced, but
not in direct proportion

© Dale R. Geiger 2011 23

 Review: Cost Terminology
• Fixed Costs - Costs that do not change in total with the volume
produced or sold
• Variable Costs - Costs that change in direct proportion with the
volume produced or sold
• Mixed Costs - A combination of fixed and variable costs
• Semi-variable Cost - Costs that change with volume produced, but
not in direct proportion

© Dale R. Geiger 2011 24

 Review: Cost Terminology
• Fixed Costs - Costs that do not change in total with the volume
produced or sold
• Variable Costs - Costs that change in direct proportion with the
volume produced or sold
• Mixed Costs - A combination of fixed and variable costs
• Semi-variable Cost - Costs that change with volume produced, but
not in direct proportion

© Dale R. Geiger 2011 25

 Review: Cost Terminology
• Fixed Costs - Costs that do not change in total with the volume
produced or sold
• Variable Costs - Costs that change in direct proportion with the
volume produced or sold
• Mixed Costs - A combination of fixed and variable costs
• Semi-variable Cost - Costs that change with volume produced, but
not in direct proportion

© Dale R. Geiger 2011 26

 Check on Learning
• Which type of cost remains the same in total when units
produced or sold increases?
• Which type of cost remains the same per unit when units
produced or sold increases?

© Dale R. Geiger 2011 27

 Identify Assumptions
• The following are implied in the simple breakeven equation:
• A single product or service
• Clearly segregated fixed and variable costs
• Variable costs are linear on a per-unit basis
• If analyzing multiple products is desired:
• Use “$1 of Revenue” as the Unit -or-
• Use a weighted average unit

© Dale R. Geiger 2011 28

The Breakeven Equation
Revenue – Costs = Profit

© Dale R. Geiger 2011 29

 The Breakeven Equation
Revenue –Costs = Profit
Revenue - Variable Cost - Fixed Cost = Profit

© Dale R. Geiger 2011 30

 The Breakeven Equation
Revenue –Costs = Profit
Revenue - Variable Cost - Fixed Cost = Profit
Breakeven Point is where Profit = 0
Revenue - Variable Cost - Fixed Cost = 0
Revenue = Variable Cost + Fixed Cost

© Dale R. Geiger 2011 31

 The Breakeven Equation
Revenue –Costs = Profit
Revenue - Variable Cost - Fixed Cost = Profit
Breakeven Point is where Profit = 0
Revenue - Variable Cost - Fixed Cost = 0
Revenue = Variable Cost + Fixed Cost
Revenue = #Units Sold * Selling Price $/Unit
Variable Cost = #Units Sold * Variable Cost $/Unit

© Dale R. Geiger 2011 32

 Sample Problem
• The following costs are incurred per show at Sebastian’s Dinner Theater:
• Facilities cost $500
• Staff (actors who double as servers) 1000
• Kitchen staff 200
• Stage crew 300
• Food cost (per ticket) 10
• Ticket Price is $30
• Task: Calculate Breakeven number of tickets.

© Dale R. Geiger 2011 33

 Solving the Problem (part 1)
• Identify the key variables in the equation
• What are the fixed costs?
• Facilities cost 500
• Staff (actors who double as servers) 1000
• Kitchen staff 200
• Stage crew 300
• Total 2000
• What are the variable costs?
• $10 Food/Ticket * #Tickets
• What is the revenue?
• $30 Price/Ticket * #Tickets

© Dale R. Geiger 2011 34

 Solving the Problem (part 1)
• Identify the key variables in the equation
• What are the fixed costs?
• Facilities cost 500
• Staff (actors who double as servers) 1000
• Kitchen staff 200
• Stage crew 300
• Total 2000
• What are the variable costs?
• $10 Food/Ticket * #Tickets
• What is the revenue?
• $30 Price/Ticket * #Tickets

© Dale R. Geiger 2011 35

 Solving the Problem (part 1)
• Identify the key variables in the equation
• What are the fixed costs?
• Facilities cost 500
• Staff (actors who double as servers) 1000
• Kitchen staff 200
• Stage crew 300
• Total 2000
• What are the variable costs?
• $10 Food/Ticket * #Tickets
• What is the revenue?
• $30 Price/Ticket * #Tickets

© Dale R. Geiger 2011 36

 Solving the Problem (part 1)
• Identify the key variables in the equation
• What are the fixed costs?
• Facilities cost 500
• Staff (actors who double as servers) 1000
• Kitchen staff 200
• Stage crew 300
• Total 2000
• What are the variable costs?
• $10 Food/Ticket * #Tickets
• What is the revenue?
• $30 Price/Ticket * #Tickets

© Dale R. Geiger 2011 37

 Define Contribution Margin
• Contribution Margin = Sales – Variable Cost
• Unit Contribution Margin Represents the dollar amount that each
unit sold Contributes toward profit
Unit Contribution Margin =
Selling Price $/Unit – Variable Cost $/Unit

• What is the Unit Contribution Margin for Sebastian’s Dinner

Theater?
• For every ticket sold, profit increases by:
$30 - $10 = $20
© Dale R. Geiger 2011 38
 Define Contribution Margin
• Contribution Margin = Sales – Variable Cost
• Unit Contribution Margin Represents the dollar amount that each
unit sold Contributes toward profit
Unit Contribution Margin =
Selling Price $/Unit – Variable Cost $/Unit

• What is the Unit Contribution Margin for Sebastian’s Dinner

Theater?
• For every ticket sold, profit increases by:
$30 - $10 = $20
© Dale R. Geiger 2011 39
 Define Contribution Margin
• Contribution Margin = Sales – Variable Cost
• Unit Contribution Margin Represents the dollar amount that each
unit sold Contributes toward profit
Unit Contribution Margin =
Selling Price $/Unit – Variable Cost $/Unit

• What is the Unit Contribution Margin for Sebastian’s Dinner

Theater?
• For every ticket sold, profit increases by:
$30 - $10 = $20
© Dale R. Geiger 2011 40
 Define Contribution Margin
• Contribution Margin = Sales – Variable Cost
• Unit Contribution Margin Represents the dollar amount that each
unit sold Contributes toward profit
Unit Contribution Margin =
Selling Price $/Unit – Variable Cost $/Unit

• What is the Unit Contribution Margin for Sebastian’s Dinner

Theater?
• For every ticket sold, profit increases by:
$30 - $10 = $20
© Dale R. Geiger 2011 41
 Define Contribution Margin
• Contribution Margin may be stated as a Percentage:
Unit Contribution Margin/Unit Selling Price
• Sebastian’s Contribution Margin Percentage =
$20/$30 =
$20/$30 = approximately .67 or 67%
• For every $1 of sale, profit will increase by approximately $.67

© Dale R. Geiger 2011 42

 Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
(30-10)(#Tickets) – 2000 = 0
20(#Tickets) – 2000 = 0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100

© Dale R. Geiger 2011 43

 Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
20(#Tickets) – 2000 = 0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100

© Dale R. Geiger 2011 44

 Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) – $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100

© Dale R. Geiger 2011 45

 Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100

© Dale R. Geiger 2011 46

 Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
20(#Tickets) = 2000
#Tickets = 2000/20
#Tickets = 100

© Dale R. Geiger 2011 47

 Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = 0
$20(#Tickets) = $2000
#Tickets = 2000/20
#Tickets = 100

© Dale R. Geiger 2011 48

 Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
$20(#Tickets) = $2000
#Tickets = $2000/$20
#Tickets = 100

© Dale R. Geiger 2011 49

 Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
$20(#Tickets) = $2000
#Tickets = $2000/$20
#Tickets = 100

© Dale R. Geiger 2011 50

 Solving the Problem (part 2)
Revenue – Variable Cost – Fixed Cost = Profit
Breakeven is the point where Profit = 0
$30(#Tickets) - $10(#Tickets) – $2000 = $0
($30-$10)(#Tickets) – $2000 = $0
$20(#Tickets) – $2000 = $0
$20(#Tickets) = $2000
#Tickets = $2000/$20
#Tickets = 100

© Dale R. Geiger 2011 51

 Proving the Solution
• Plug solution into the original equation:

$30(#Tickets) – $10(#Tickets) – $2000 = $0

$30(100) – $10(100) – $2000 = $0
$3000 – $1000 – $2000 = $0

© Dale R. Geiger 2011 52

 Critical Thinking Questions
• Is this quantity of tickets feasible?
• Why or why not?

© Dale R. Geiger 2011 53

 Check on Learning
• Does the Unit Contribution Margin appear in the Breakeven
Equation?
• Using Sebastian’s Dinner theatre data how many tickets must be
sold to yield a profit of $500 per show?
• $1000 per show?
Sale Price = $30 / ticket Fixed Cost = $2,000
Variable Cost = $ 10 / ticket

© Dale R. Geiger 2011 54

Practical Exercise

© Dale R. Geiger 2011 55

 Using the Breakeven Spreadsheet

Enter Data from

Practical Exercises
in Spaces Provided
Use Tabs to
Navigate

56
© Dale R. Geiger 2011
Using the Breakeven Spreadsheet

“Breakeven Point” Tab shows

Graphic Solution and Proof
Calculation

57
© Dale R. Geiger 2011
Using the Breakeven Spreadsheet

Blue Area indicates

Contribution Margin at
Various Quantities

58
© Dale R. Geiger 2011
Using the Breakeven Spreadsheet

“Cost” Tab Details Fixed

Cost, Variable Cost, and
Total Cost

© Dale R. Geiger 2011 59