Break Even Analysis

For a new company in market, shareholders often want to know their production level
where total profit earned from product revenue cover the total investment used to
manufacture it. Break-even analysis is how we determine this level. Break-even analysis
immensely important analysis, since it is useful to determine the appropriate price of
manufactured product and determines how many numbers of units that need to be sold in
so that profit from revenue cover the cost or make a profit. Not only that break-even
analysis can also check the viability of entire business ideas mathematically. In other words,
it gives roughly figure, whether underlying project is worth pursuing or not
Break Even Analysis of our product:
For our product rough estimation of data are as follows

Quantity Sold/Served 10,000

Time Frame

FIXED COSTS
Item Total Cost Allocated Unit Cost
Manufacturing equipment $ 5,05,000.00 $ 50.50
Computer $ 15,000.00 $ 1.50
Other Technical equipment $ 15,000.00 $ 1.50
Plant building $ 8000,000.00 $ 80.0
Insurance $ 12,000.00 $ 1.20
Advertising $ 12,000.00 $ 1.20
Principle portion of debt
repayment $ 100,000.00 $ 10.0
Registration cost $ 1,000.00 $ 0.10
Average Fixed Cost per Unit $ 146.60
TOTAL FIXED COSTS $ 1 4,60,000.00

VARIABLE COSTS
Item
Material Cost of Unit Epan
Manufacturing (shaping )
commission
Average Variable Cost per Unit
TOTAL VARIABLE COSTS
Total Cost Cost per Unit
$ 25,0000.00 $ 2.50
$ 1,00000.00 $ 1.0
$ 1,00000.00 $ 1.0
$ 4.50
$ 355,000.00

AVERAGE TOTAL COST PER UNIT $ 70.30

TOTAL COSTS $ 17,63,000.00
Let us assume that annually we want to recover 10% (i.e. 146000) fixed of the total cost annually.

(Note above given data are total cost not annual cost)
From graphical solution method we can extract the following information

1) Our company must have to sell 100000 units to reach break even point at approximately
($6) sales price. Analytically in the context of Australia, current population of Australia is
around 25 million if one family have 5-member (one family one epan assumption) total
potential buyers =25/5 = 5 million. Which means our company should able to capture only
2% ( 0.1/5) of total Australian market .

2) If our company want to sale the product at $7 will make the profit of $104000 after
repaying all the related cost i.e. net profit however selling at $5 result in loss of $96000 .

How Much sales for regular Cash inflow (net profit) Of $ 146000 (10% of total
fixed cost) at sales price of $6.
From graphical break even solution, it is quite clear that if our company wants
to recover all the investment form revenue profit in 10 years annual sales of
Epan unit must be equal to 195000 or more at $ 6 sales price.
Total
Unit sold 195000 sales Price Revenue Cost Profit
Cost Per unit 4.5 1 195000 1023500 -828500

Fixed Cost 146000 2 390000 1023500 -633500

3 585000 1023500 -438500
4 780000 1023500 -243500
5 975000 1023500 -48500
6 1170000 1023500 146500
7 1365000 1023500 341500
8 1560000 1023500 536500
9 1755000 1023500 731500
10 1950000 1023500 926500
11 2145000 1023500 1121500
12 2340000 1023500 1316500

2500000

2000000

1500000
Revenue
1000000
Total Cost
500000 Profit

0
1 2 3 4 5 6 7 8 9 10 11 12
-500000

-1000000