1. Calculate Breakeven Point © Dale R. Geiger 20111

2. How do NAF organizations do this? User Fees Costs © Dale R. Geiger 20112

3. 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 20113

4. 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 20114

5. 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 20115

6. 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 20116

7. 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 20117

8. 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 20118

9. 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 20119

10. 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 201110

11. 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 201111

12. Check on Learning Why do we need assumptions? How many products do we use in breakeven analysis? © Dale R. Geiger 201112

13. The Breakeven Equation Revenue – Costs = Profit © Dale R. Geiger 201113

14. The Breakeven Equation Revenue –Costs = Profit Revenue - Variable Cost - Fixed Cost = Profit © Dale R. Geiger 201114

15. 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 201115

16. 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 201116

17. Graphic Depiction of Breakeven $ Units Sold © Dale R. Geiger 2011 17

18. Graphic Depiction of Breakeven $ Units Sold © Dale R. Geiger 2011 18

19. Graphic Depiction of Breakeven Units Sold $ © Dale R. Geiger 2011 19

20. Graphic Depiction of Breakeven Units Sold $ © Dale R. Geiger 2011 20

21. Graphic Depiction of Breakeven $ Units Sold © Dale R. Geiger 2011 21

22. Graphic Depiction of Breakeven $ Units Sold © Dale R. Geiger 2011 22

23. Graphic Depiction of Breakeven $ Units Sold © Dale R. Geiger 2011 23

24. Check on Learning How is the breakeven equation expressed? Which variables are represented on the graph by upward sloping lines? © Dale R. Geiger 201124

25. 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 201125

26. 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 Total2000 What are the variable costs? $10 Food/Ticket * #Tickets What is the revenue? $30 Price/Ticket * #Tickets © Dale R. Geiger 201126

27. 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 Total2000 What are the variable costs? $10 Food/Ticket * #Tickets What is the revenue? $30 Price/Ticket * #Tickets © Dale R. Geiger 201127

28. 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 Total2000 What are the variable costs? $10 Food/Ticket * #Tickets What is the revenue? $30 Price/Ticket * #Tickets © Dale R. Geiger 201128

29. 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 Total2000 What are the variable costs? $10 Food/Ticket * #Tickets What is the revenue? $30 Price/Ticket * #Tickets © Dale R. Geiger 201129

30. 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 201130

31. 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 201131

32. 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 201132

33. 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 201133

34. 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 201134

35. 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 201135

36. 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 201136

37. 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 201137

38. 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 201138

39. 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 201139

40. 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 201140

41. 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 201141

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 201142

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 201143

44. Graphic Solution $ Units Sold © Dale R. Geiger 2011 44

45. 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 201145

46. Critical Thinking Questions Is this quantity of tickets feasible? Why or why not? © Dale R. Geiger 201146

47. 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 / ticketFixed Cost = $2,000 Variable Cost = $ 10 / ticket © Dale R. Geiger 201147

48. Practical Exercise © Dale R. Geiger 201148

49. Practical Exercise © Dale R. Geiger 201149

50. Using the Breakeven Spreadsheet Use Tabs to Navigate Enter Data from Practical Exercises in Spaces Provided Enter Data from Practical Exercises in Spaces Provided © Dale R. Geiger 2011 50

51. Using the Breakeven Spreadsheet “Breakeven Point” Tab shows Graphic Solution and Proof Calculation © Dale R. Geiger 2011 51

52. Using the Breakeven Spreadsheet Blue Area indicates Contribution Margin at Various Quantities Blue Area indicates Contribution Margin at Various Quantities © Dale R. Geiger 2011 52

53. Using the Breakeven Spreadsheet “Cost” Tab Details Fixed Cost, Variable Cost, and Total Cost © Dale R. Geiger 201153