Breakeven Analysis Quantitative Tool for Evaluating Alternatives

Breakeven Analysis Organizations face Variables Costs (VC). Variable Costs (VC) change with the volume of production, e.g. cost of materials or labor. Organizations face Fixed Costs (FC). Fixed Costs (FC) do not change with volume of production and would be incurred even if no products were manufactured or sold, e.g. Utilities, Advertising and Sales Expenses, Machinery. Price (P) per Unit is the revenue obtained per unit. Unit Contribution or Margin per Unit is the difference between price per unit and variable cost per unit, i.e. Unit Contribution = P per unit – VC per unit Breakeven volume is found by dividing the total fixed costs by the unit contribution Breakeven Volume (Units) =Total Fixed Costs Unit Contribution

Break Even Analysis Breakeven occurs when Total Costs = Total Revenues Total Costs = Fixed Costs + Variable Costs If TC are greater than TR than loss is incurred. If TR are greater than TC than profit is incurred. Typically TR are less than TC at beginning stages of production Raising prices will reduce BEP. Lowering prices will increase BEP.

Diaper Rash Strategy Breakeven Analysis 400,000 Doctors & Nurses (11% in CA or 44,000) Cost of List$ Mailing Cost Cost of Samples Demonstrations (# per group) Advertising Journal A (#) Advertising Journal B Conventions (#) Total Promotional Costs$ BEP

Special Occasion Strategy Breakeven Analysis 1,000,000 Mothers in CA (1,000,000 / 1,000 = 1,000) Cost of List $ Mailing Costs Cost of Samples Cost of Advertising Total Promotional Costs $ BEP

Head On Strategy Breakeven Analysis Promotional Costs$ BEP