Week 8 Breakeven Analysis

Breakeven Analysis

Breakeven analysis answers the question: how many widgets do I have to sell before I begin to make money?

The breakeven point occurs when the $ coming in = the $ going out, or, in other words, when Total Revenue = Total Cost

The breakeven quantity, where total revenue = total costs is found using the following equation:

Where:		Q	=		the quantity sold
		FC	=		total fixed costs, or the total initial investment
		P	=		the selling price
		VC	=		variable costs per unit (the amount it costs to produce a unit to be sold)

Let’s apply the breakeven formula to Amalgamated Hat Rack’s plastic extruder project:

• The fixed initial investment (FC) is $100,000
• Let’s assume that each hat rack produced by the extruder can be sold for $75 (P = $75)
• And let’s assume that it costs $22 to produce each hat rack (VC = $22)

Given these inputs, the breakeven quantity is:

Therefore Amalgamated must sell 1,887 hat racks to recover the $100,000 it spent for the new plastic extruder.

At this point, Amalgamated must decide whether the breakeven sales volume is achievable. Can it realistically expect to sell 1,887 units? If so, how long will it take?