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BREAKEVEN ANALYSIS
Lesson (17)

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Breakeven Analysis for a

Single Project

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13.1 A Cost Revenue Model Approach

A popular application of Breakeven
(BE) is where cost revenue volume
relationships are studied;
We define cost and revenue functions
and assume some linear or non-linear
cost or revenue relationships to model;
One objective: Find a parameter that
will minimize costs or maximize profits
termed QBE.
3

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13.1 Cost Models Fixed Costs

Fixed Costs Cost that do not vary
with production or activity levels

Costs of buildings;
Insurance;
Fixed Overhead;
Equipment capital recovery;
etc.

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13.1 Variable Costs

Costs that vary with the level of
activity;

Direct Labor wages;

Materials;
Indirect costs;
Marketing;
Advertising;
Warranty;
Etc.

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13.1 Total Costs

Total Cost = Fixed Costs + Variable
Costs;
TC = FC + VC;
Profit Relationships;
Profit = Revenue Total Cost
P = R TC
P = R {FC + VC}.

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13.1 Cost Revenue Relationships

Linear Models;
Non-linear models;
A basic linear Cost Relationship is
shown on the next slide.

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Figure 16-1

WCB/McGraw-

Linear and nonlinear revenue and cost relations used in breakeven analysis.

The McGraw-Hill Companies,

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13.1 Basic Cost Relationship (Linear)

C
O
S
T

Total Costs

Variable Costs

Fixed Costs ( level)

Q Level of Activity per time unit

9

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13.1 Non-linear Models

Non-linear Models;

One or more of the relationships is

(are) non-linear;

Example Follows:

10

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13.1 Basic Cost Relationship (Linear)

C
O
S
T

Total Costs

Variable Costs

Fixed Costs ( level)

Q Level of Activity per time unit

11

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13.1 Breakeven
The breakeven point, QBE is the
point where the revenue and total
cost relationships intersect:
For non-linear forms, it is possible
to have more than one QBE point.

12

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13.1 Reduction of Variable costs

BE point
Changes
When the
VCs are
Lowered.

Figure 16-2

Effect on the breakeven point when the variable cost per unit is reduced.

13

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Example

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