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Breakeven and

Payback Analysis
C K Biswas
Dept of ME

LEARNING OUTCOMES
1. Breakeven point one parameter
2. Breakeven point two alternatives

Cost-Revenue Model
Fixed cost, FC Costs not directly dependent on the variable,
e.g., buildings, fixed overhead, insurance, minimum
workforce cost
Variable cost, VC Costs that change with parameters such
as production level and workforce size. These are labour,
material and marketing costs. Variable cost per unit is v
Quantity, Q no. of units manufactured, units/year
Total cost, TC Sum of fixed and variable costs, TC = FC + v Q
Revenue, R Amount is dependent on quantity sold.
Revenue/ selling price per unit is r
So, Revenue, R = r Q

Breakeven for linear R and TC


R=rQ

Breakeven point
R=TC

TC = FC + v Q
Profit

Loss
FC

Breakeven equation
Profit, P Amount of revenue remaining after costs. Negative P is
loss.
P = R TC = r Q (FC + v Q)
When Profit =0, the Q value is known as
Breakeven value,QBE
0 = rQBE ( FC + vQBE)

Example
A plant produces 15,000 units/month. Find breakeven
level if FC = `75,000 /month, revenue is `8/unit and
variable cost is `2.50/unit. Determine expected monthly
profit or loss.

Solution: Find QBE and compare with 15,000


Profit

Production level is above the breakeven

Calculate profit, P = R (FC + VC)


= rQ (FC + vQ) = (r-v)Q FC
= (8.0 2.5)(15,000) 75,000
= `7500/month

Example: two alternatives


A component has potential to earn revenue of `8/unit and any no. of
units can be sold in the market. There are two different machines
available in market to manufacture it. Which machine should be
bought? If the machines have the following:
M/c
1

A machine produces 15,000


units/month and FC = `75,000 /month,
and variable cost is `2.50/unit.
< 15,000 units/ month

M/c
2

Another machine produces 25,000


units/month, and FC = `100,000 /month,
and variable cost is `3.50/unit.

Both M/cs will operate above Break Even point

< 25,000 units/ month

Example: two alternatives


Calculate profit earned by both M/cs

M/c
1

M/c
2

A plant produces 15,000 units/month


and FC = `75,000 /month, and variable
cost is `2.50/unit.

Another plant produces 25,000


units/month, and FC = `100,000 /month,
and variable cost is `3.50/unit.

M/c 2 will earn more profit