Breaking-Even on a

Target ProfitPrepared by Eric Acchitelli

The Steps1. Understanding the Basics2. Calculate Contribution & Unit Contribution3. Calculate the Break-Even Point (No Profit)4. Calculate the Break-Even Point (Target Profit)

1. Understanding the Basics

• Definitionso Revenue – The amount of money actually received by a company,

without regard to any costs that may be incurredo Costs – “the amount of money that is needed to pay for or buy

something”o Fixed Costs – Costs that have a constant value “regardless of the

volume of production”o Variable Costs – Costs that increase or decrease and are “directly

traceable to the volume of activity…”o Profit –The remaining money after accounting for all costs

• The Equation

2. Calculate Contribution & Unit

Contribution• “The funds available to the seller of an item after

subtracting the variable costs associated with it…”

• Unit Contribution – The contribution per item sold

• Calculating Contribution and Unit Contribution

Contribution Example• Grandma’s Cookie Company is a small company

that sells cookies by the dozen. If the company sells 200 dozens for $1600 total and spends $1000 on supplies every day, what is the contribution and unit contribution for the cookies?

• Solution

3. Calculate the Break-Even Point (No Profit)• Break-Even Point – “The point, in dollars and

units, at which costs equal revenue.”o Bare minimum goal for a company: “We have no profit, we have no

losses; we have only broken even.”

• Calculating the Break-Even Point*

• [Useless on its own]

Break-Even Point Example

• Every day, Grandma’s Cookie Company spends $75 in fixed costs (electricity, climate control in the shop, etc.). How many dozens would the company need to sell in order to break even every day, and how much revenue does this bring in?

• Solution

4. Calculate the Break-Even Point (Target

Profit)• Most companies don’t operate on a break-even

principleo Want to spend money to make more money

• Calculate the Target Profit Point

Target Profit Example• Suppose Grandma’s Cookie Company wants to

make a profit of $225 every day. How many units would the company have to sell to reach that profit impact?

• Solution

A Summary1. Understanding the Basics

a.

2. Calculate Contribution & Unit Contributiona. b.

3. Calculate the Break-Even Point (No Profit)a. b.

4. Calculate the Break-Even Point (Target Profit)a. b.

Any Questions?

Thank you for your time.

Works Cited• “Cost.” Merriam-Webster. Merriam-Webster, Inc., n.d.

Web. 10 Oct. 2013http://www.merriam-webster.com/dictionary/cost.

• Heizer, Jay H., and Barry Render. “Break-Even Analysis." Operations Management. 10th ed. Upper Saddle River, NJ: Prentice Hall, 2011. 292- 96. Print.

• “Revenue.” Investopedia. ValueClick, Inc., n.d. Web. 10 Oct. 2013. http

://www.investopedia.com/terms/r/revenue.asp.• Transparent Cookie. Digital image. Radically

Transparent. Tumblr, July 2013. Web. 10 Oct. 2013. http://24.media.tumblr.com/e6282d2fce7724e9cb2c7dfec35e2269/tumblr_mpuwsintBC1sn8q7mo1_500.png.

Breaking-Even for Multiple Products

• Companies often have a line of products from which they want to profit

• Calculating Break-Even Point for Multiple Products (n) at a Target Profit