Break-Even  Analysis

2013 March 27th In the BUS106 class some students were expressing frustration about understanding something in their intro to marketing course about Break Even Analysis. So I grabbed my little Nikon AW 100 and made this quick video discussing WHAT Break Even Analysis is, and  WHY it is useful to have this information

.

.

Break Even Analysis is one of those things that many Marketing students are afraid of trying to understand because it involves a little bit of math - however the math is simple - so try to grasp the concept cause it is important that you know how to do this. It is done for little businesses and big businesses - the main reason is to have some idea of how much to sell, before you start making a profit - and if that number is too difficult to do - then maybe you can change it by increasing your price, or cutting costs - that is the guts of the  analysis. Break Even Analysis is explained most mainstream marketing textbooks - there are also many good websites that explain it too - and they give some simple examples - as seen below. Break-even Analysis may take a little bit of time to understand but you should make an effort to grasp this concept - people really do this in business and if you can tell a potential employer that you are able to do this, it will increase your competitiveness. Break-even Analysis  is used by business to help them arrive at a price that will allow them to make some profit, and, know when that will happen in the future. WTGR

.

Chpt 18 Shapiro Break-even Analysis   Chapter 15 Sommers page 468

. The problem with Break-even Analysis in the "REAL WORLD" is that the true costs are difficult to calculate cause there are always so many things that go wrong and mistakes that happen in production - which skew the figures. Break Even Analysis is sometimes difficult to calculate precisely in the REAL WORLD - beeeeecause, there is nothing in the mathematics of the calculation that allows for the "COMPETITIVE ENVIRONMENT". This refers to the fact that the competition may cause you to have to lower your price, or demand may change - which in turn means your calculation about WHEN you break even will change. WTGR .

.
.

"One important  disadvantage of the break-even analysis is that it requires estimating a single       per-unit variable cost, and a single per-unit price or revenue, for the entire business. That is a hard concept to estimate in a normal business that has a     collection of products or services to sell."

.

Scenario So, assume we have a product we want to sell for $10.00 and we want to sell 1,000 of them. For this example our total fixed costs are going to be $7,700 and our total variable costs are $4.50/unit. Our formula would look like this:                          P=1,000 ($10.00 - $4.50) - $7,700 = $5,500 - $7,700 = -$2,200 What happened? Instead of making money we have just lost $2,200. At break even the $2,200 number  should be $0. We can't make money at 1000 units so how many must we really sell to break  even? We know our fixed costs (F) are $7700, and the price (p) is still $10.00 and our variable costs (V) are $4.50/unit we do this:                     (p) price minus (V) variable costs divided into (F) fixed costs or                     $10.00 - $4.50 = $5.50 divided into $7700 = 1400 units.  If we maintain our price and expenses we need to sell 1400 units of our product to break even. If we raise our price or reduce expenses we can sell less. - this explanation comes from Eagle Marketing, Bozeman, Montana

.

witiger.com	CONTACT I MAIN PAGE I NEWS GALLERY I E-BIZ SHORTCUTS I INT'L BIZ SHORTCUTS I MKTG?BUSINESS SHORTCUTS I TEACHING SCHEDULE
	.
	MISTAKES ITEXTS USED I IMAGES I RANK IDISCLAIMER I STUDENT CONTRIBUTORS I FORMER STUDENTS I PUBLICATIONS I TIPS I
	.

Prof. W. Tim G. Richardson © www.witiger.com