Break-Even Analysis INTRODUCTION Contents
Introduction:This sheet
Analysis:Entry screen for fixed and variable costs, pricing/contribution,
and volume information
Chart:Displays break-even point, variable costs, fixed costs,
and contribution in dollars and units
Table:Output data which generates break-even chart
Overview
Managers often want to know the production level where profits earned from a product cover
the cost of resources used to create it. Break-even analysis is how we determine this level.
The point at which total sales revenues covers the costs of committed resources is called the break-even point. In addition to knowing the break-even point, managers may also want to
know the point at which sales volume reaches a pre-set target-profit level.
This tool helps you perform both of these calculations. The first is break-even analysis
where your goal is to determine how many units you must sell to recover all of your fixed
costs. The second is target-profit analysis where your goal is to determine how many
units you must sell to reach a pre-defined profit level. The difference between the two is
that at break-even your target-profit is zero, whereas when you specify a target-profit
that is greater than zero, you are setting your goal above the break-even point.
Directions
You may want to print these directions as a reference guide for this tool.
These directions provide a general introduction to the contents of each worksheet
in the tool. For more detailed directions place your mouse above the red celltips
located throughout the tool. See this example -->
Analysis:The analysis page is your primary input sheet. Here you will
tell the tool what type of analysis you want to perform, input
the data required to perform calculations, and view some of
the output of those calculations.
Chart:The chart sheet is one of the two report sheets in this tool.
Here you can visually measure your break-even or target-profit
level along with total fixed and variable costs. If you chose to
calculate the number of months before you reach break-even
or target-profit those numbers will be reported here.
Table:The table sheet is the second output report and contains the
data used to generate the break-even/target-profit chart. This
includes ten data points on either side of the break-even/target-profit
point.
Important Note:This tool is based on a Microsoft Excel worksheet. Any changes
you make to this file are permanent once you save the file. To
re-use this tool as a template for break-even calculations, always
open a new copy of the tool and save your results with a
different file name.
To start using the tool, remove the sample data from the tool using the Show/Hide
Sample Data option under the HBS Menu
Break-Even Analysis INTRODUCTION
Sample Problem
A company wants to begin selling a new pair of hand-held pliers in the upcoming fiscal
year. They want to know how many hand-held pliers they will have to sell in order to
break-even on this investment in materials and equipment. They received the following
data from the chief financial officer:
Fixed costs
Metal molding machine:$100,000
Plastic grip molder:$25,000
Sander:$5,000
Variable costs (per unit)
Packaging material:$1.00
Raw material$1.00
Grip material:$0.50
Shipping $0.50
The marketing department estimates that they can sell their new pliers for
$15.00 per unit. They further project that they will average 1200 units
per month.
The goal is that they will break-even and start to earn a profit within
the first year. His target-profit level for the end of the first fiscal year is
$100,000.
Note About Using Internet Explorer
The default setting in Internet Explorer is to open these tools in the Explorer application
insteadof Excel. We recommend against this and provide directions in the Help section of
the HBSToolkit web site to change this default behavior.
HBS Menu
Show/Hide Sample Data:Displays or removes sample entries
Show Calculator:Launches Windows calculator
Show/Hide Celltips:Toggles in/out red Celltips in documented cells
Print Sheet with Celltips:Prints Celltip documentation on current sheet
Set Zoom:Provides quick access to 80%, 100%, and 125% zoom levels
Visit Web Links:Links to HBS Toolkit website, Toolkit Glossary, and Toolkit
Feedback, as well as HBS and HBS Publishing web sites About HBS Toolkit:Launches the about box for the HBS Toolkit
Jon B. DeFriese MBA `00 and Chad Ellis, MBA `98 developed this software under the
supervisionof Professor Steven Wheelwright as the basis for class discussion rather than
to illustrate eitherthe effective or ineffective handling of an administrative situation.
Copyright ? 1999 President and Fellows of Harvard College