Cost-Volume-Profit Analysis -
Break-even Analysis

Break-even analysis pinpoints where revenue equals total costs. What kind of questions does it help you answer?  At what sales volume will the operation make money?  What should the profit(loss) be at a particular sales volume?  How much sould expenses be at a particular sales volume? To calculate your break-even point, take your most current income statement and identify each cost as either fixed or variable. Fixed costs are independent of sales level, while variable costs rise and fall with sales. Mixed costs involve elements of both. Most costs will fall readily into fixed or variable. For those that don't, allocate 50% to fixed costs, and 50% to variable.

The break-even chart is an L-shaped graph, where dollars are plotted along the Y/Vertical axis and number of meals are plotted on the X/Horizontal axis.

Fixed Expenses:      Variable Expenses: 
Salaries             Sales commissions 
Office expenses      Taxes 
Payroll tax          Sales tax 
Benefits             Boxes, paper, etc. 
Utilities            Travel & entertainment 
Rent                 Freight 
Licenses & fees      Overtime 
Operating supplies   Bad debts 
Insurance            Cost of goods sold 
Advertising          Car/delivery 
Legal & accounting   Postage
Depreciation         Food
Interest             Linens
Maint. & cleaning
Dues & publications

Consider an operation that serves 800 meals per day at $10 per meal, with a daily profit of $450. Considering two levels of activity, low sales vs. high sales, the following data have been collected:
 

Number of meals sold	400	1,000
Income at $10 per meal	$4,000	$10,000
Fixed charges	$1,000	$1,000
General adminstration cost	$800(20% of total costs)	$1,600(16%)
Food cost	$1,400(35%)	$3,500(35%)
Labor cost	$1,400(35%)	$3,000(30%)
Total costs	$4,600	$9,100
Profit(loss)	$(600)	$900

You see that you loose $600 at low volume and earn $900 at high volume. 
What is the break-even point?

1. Plot the lowest point of 400 meals first 
• Point a (loss wedge)  is 400 meals at $4000 
• Point b (profit wedge) is 1,000 meals at $10,000
2. Plot fixed expenses $1,000. (A)
3. Add $800 more for administrative expenses at 400 meals and $1,600 more administrative expenses at 1,000 meals (B)
4. Now add respective food cost to low $1400 and $3500 (high) (C)
5. Finally add labor $1400 and $3000 (D)

What would happen if you have increase of 10% in selling prices and your covers went down by 5%? (Average check - $11.00 at 400 covers ) Fax in your break-even chart or, if you have prepared it using Excel, attach it to an e-mail  addressed to your instructor.

Disadvantages of Break-Even Analyses

• Most effective if there is one product 
• Mark-ups and profit margins vary 
• Hard to apply general price increase or decrease across board 
• Does not provide exact information