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There are two sections in the model: an input section and an output section. In the
to input your model assumptions, providing values for price per unit, variable costs per unit, a
associated with the marketing expenditure. You are also asked to forecast expected unit sal
The output section automatically calculates values for you -- do not enter anything into the y
they contain formulas. The output section calculates contribution margin per unit, the breake
total revenue, total costs, and total contribution margin achieved at the breakeven quantity, a
months it will take to payback the fixed cost investment.
Once you become more comfortable with running breakeven analyses, try building your own
the breakeven point.
The spreadsheet entitled Table and Graph contains a data table and a graph which help illus
represents. Both the Table and the Graph automatically populate when you enter values in t
model. Do not enter or change anything in the Table or Graph.
The Table shows you the Total Revenue, Fixed Costs, Variable Costs and the Total Costs as
quantities of units sold. The line in the Table that is marked in blue shows you the breakeven
and Total Costs are equal. All of the lines of the table that are above the blue line show you
company is not yet breaking even, where Total Revenue is less than Total Costs. All of the li
blue line show you quantities for which the company is beyond breaking even and is making
investment, where Total Revenue is more than Total Costs.
The Graph shows you the data from the Table represented in a line graph, so that you can s
fixed costs, variable costs, and total costs interact to product the breakeven point. The brea
the graph is the same one calculated by the prebuilt Excel model.
Professor Thomas Steenburgh and Professor Jill Avery (Simmons School of Management) developed t
are developed solely as the basis for class discussion and are not intended to serve as endorsements,
or illustrations of effective or ineffective management.
Copyright 2010 President and Fellows of Harvard College. To order copies or request permission to
1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbs
of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitte
means --electronic, mechanical, photocopying, recording or otherwise -- without the permission of Harv
Breakeven Analysis
Quantitative Toolkit
Sample Problem
Larson is the brand manager for the Nintendo Wii. She sells her product to Best Buy for $1
at a retail price of $269 to consumers. Sales were going well; in 2008, Larson sold 3 million
now, sales were beginning to slow down. To get sales moving again, Larson wanted to laun
campaign targeted to senior citizens which would feature the new Wii Fit game. Larson kne
profitable, with variable costs of $100, so it seemed like she could afford to spend money a
submitted her advertising plan to her boss Tess. Tess liked the idea, but asked Larson how
product she would have to sell to breakeven on the advertising investment, and whether thi
current sales levels. What is the breakeven point? Can Larson feasibly sell this quantity if
campaign? Why or why not?
Solution
Pen and Pencil Solution
If we want to use the breakeven formula, we need to know (or make assumptions for
per unit, 2.) variable costs per unit, and 3.) fixed costs associated with the investmen
The sample problem provides us with the price per unit, which is $199. Remember t
formula is not necessarily the price at which a consumer purchases the product (i.e.
not sell directly to consumers, the price per unit received by the firm is the price at w
its distribution channel partners. In this problem, Larson sells the product to Best Bu
sells the product to consumers. The correct number to use here is the price at which
The sample problem also provides us with the variable cost per unit, which is $100.
The sample problem also provides us with the fixed cost associated with the investm
Using these three numbers, we can calculate the breakeven point using the mathem
BEQ = $20,000,000 = 202,020
$199 - $100
So, in order to breakeven on her advertising investment, Larson needs to sell an incr
Wii.
How feasible is this? We know that Larson sold 3 million units in 2008, so she would
in 2009, which represents a 7% increase in sales year over year. This seems like a
calculate how long it will take Larson to sell 202,020 units based on the sales rate pe
Since she sold 3 million units in the full year, she sold 250,000 per month. Therefore
month to sell the incremental units she needs to breakeven. This seems like a reaso
to pay back the investment.
Input Section
Directions: In this section, you must input values to run the model. Values mu
that are boxed in blue like this: in order for the model to run. T
currently are the values that correspond to the sample problem. If you are con
cell, run your mouse over the red celltip for an explanation.
Fixed costs $
Output Section
Directions: In this section, the model automatically calculates the breakeven q
calculates contribution margin per unit and total revenue, total costs, and total
quantity point. Based on your expected unit sales per month input, it calculate
will take you to reach your breakeven quantity. Remember, do not type anythi
the output section that are filled in yellow like this: as they c
like an explanation of the formula which is being calculated, run your mouse o
Months to breakeven
Professor Thomas Steenburgh and Professor Jill Avery (Simmons School of Management) developed
are developed solely as the basis for class discussion and are not intended to serve as endorsements
or illustrations of effective or ineffective management.
Copyright 2010 President and Fellows of Harvard College. To order copies or request permission to
1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hb
of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmit
means --electronic, mechanical, photocopying, recording or otherwise -- without the permission of Har
Breakeven Analysis
Quantitative Toolkit
lls her product to Best Buy for $199 and Best Buy sells it
well; in 2008, Larson sold 3 million units of the Wii. But
ving again, Larson wanted to launch a $20 million advertising
he new Wii Fit game. Larson knew that her product was very
e could afford to spend money advertising the product. She
d the idea, but asked Larson how many incremental units of
ising investment, and whether this quantity was feasible, given
arson feasibly sell this quantity if she runs her advertising
o know (or make assumptions for) three pieces of data: 1.) price
sts associated with the investment.
unit, which is $199. Remember that the price that is used in the
umer purchases the product (i.e. the retail price). For firms who do
eived by the firm is the price at which the firm sells the product to
arson sells the product to Best Buy, her retailer partner, who then
r to use here is the price at which Larson sells to Best Buy.
ues to run the model. Values must be inputted into all cells
in order for the model to run. The values that are in the model
e sample problem. If you are confused about what to enter in each
n explanation.
$ 199.00
$ 100.00
$ 20,000,000
250,000
$ 99.00
202,020
$ 40,202,020
$ 20,202,020
$ 20,000,000
$ 99.00
202,020
$ 40,202,020
$ 20,202,020
$ 20,000,000
$ 40,202,020
$0.00
0.8
Fixed costs
Output Section
Directions: In this section, the model automatically calculates the breakeven quantity for yo
calculates contribution margin per unit and total revenue, total costs, and total profit at the b
quantity point. Based on your expected unit sales per month input, it calculates how many
will take you to reach your breakeven quantity. Remember, do not type anything into any o
the output section that are filled in yellow like this:
like an explanation of the formula which is being calculated, run your mouse over the red ce
*Remember, that at the breakeven quantity Total Revenue = Total Costs, so the firm's profit
If you find that the breakeven quantity is highly feasible and can be achieved in a reasonab
months, then you should recommend investment in the fixed cost program.
If you find that the breakeven quantity is not feasible and can not be achieved in a reasona
of months, then you should not recommend investment in the fixed cost program. It is prob
going to pay back.
Professor Thomas Steenburgh and Professor Jill Avery (Simmons School of Management) developed
are developed solely as the basis for class discussion and are not intended to serve as endorsements
or illustrations of effective or ineffective management.
Copyright 2010 President and Fellows of Harvard College. To order copies or request permission to
1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hb
of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmit
means --electronic, mechanical, photocopying, recording or otherwise -- without the permission of Har
Breakeven Analysis
Quantitative Toolkit
$ 5,000.00
$ 3,000.00
$ 50,000,000
4,500
$ 2,000.00
25,000
$ 125,000,000
$ 75,000,000
$ 50,000,000
$ 125,000,000
5.6
Notice that at the breakeven quantity, notated by the blue bar, total revenue is equal to tota
as a result, the profit is zero. For all quantities below the breakeven quantity, total costs are
total revenue, generating a negative profit -- the firm is losing money. For all quantities abo
quantity, total costs are less than total revenue, generating a positive profit -- the firm is ma
Breakeven Graph
This graph automatically populates based on the values you entered into the Excel model.
Total Revenue and Total Costs of the firm at various unit volumes.
Notice that the breakeven quantity occurs at the point where the total revenue and total cos
intersect. For all unit quantities below the breakeven quantity, the total cost curve is above
curve, indicating that the firm is losing money. For all unit quantities above the breakeven q
total cost curve is below the total revenue curve, indicating that the firm is making money.
$300,000,000
Dollars
$250,000,000
$200,000,000
$150,000,000
$100,000,000
$50,000,000
$0
- 0 00 00 00 00 00 00 00 00 00
00 0 0 0 0 0 0 0 0 0
5, 10, 15, 20, 25, 30, 35, 40, 45, 50,
Unit Volume
Professor Thomas Steenburgh and Professor Jill Avery (Simmons School of Management) developed
are developed solely as the basis for class discussion and are not intended to serve as endorsements
or illustrations of effective or ineffective management.
Copyright 2010 President and Fellows of Harvard College. To order copies or request permission to
1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hb
of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmit
means --electronic, mechanical, photocopying, recording or otherwise -- without the permission of Har
Breakeven Analysis
Quantitative Toolkit
00 00 00 00
0,0 5,0 0,0
4 4 5
These online quantitative toolkits were designed to help facilitate the quantitative analyses th
marketing decision making. There are five toolkits, each focusing on a particular type of qua
Situation Analysis
Breakeven Analysis
Customer Lifetime Value Analysis
Market Size and Market Share Analysis
Pricing and Profitability Analysis
Toolkit Contents
Each toolkit contains an Introduction which explains the analytical concept, explores how it
making, and shows in words, mathematical formulas, and concrete examples how to calcula
should carefully review the Introduction so that you are familiar with the analysis, how it is ca
when it is used in marketing. The Introduction is contained in the first spreadsheet within the
The second spreadsheet within each toolkit contains a Sample Problem, which guides you
concept, shows you the solution using pen and paper methods, and then shows you how to
Excel model to yield the solution.
Once you have grasped the analytical concept, you are ready to explore the
accompany each toolkit. These models are designed to do the calculations for you. Each m
In the Input Section, you will need to input various pieces of data to be analyzed.
put into each of the cells in the Input Section in order for the model to run. For ex
be asked to input the price of the product, the variable costs of the product, the fix
the acquisition cost of a customer, the total number of customer in a market, etc.
model's "assumptions" which drive the calculations and are usually found in the ca
Once all of the input values are inputted, the model is ready to go to work. Prebu
Output Section automatically calculate key components of the quantitative analy
of the output sections calculate Total Revenue, Total Costs, and Total Profits. Eac
Sections calculates the final answer; for example, the Breakeven Analysis toolkit's
breakeven quantity, the Customer Lifetime Value Analysis toolkits' model calculate
It is important that you do not enter values into the Output Section of the model, a
formulas that run the analysis. Cells containing prebuilt formulas are colored ye
always avoid changing anything in a yellow cell.
Note: the values contained in the Excel model Input Section are random values. You should
before using the tool to solve a problem.
The Prebuilt Excel Spreadsheet Models are contained in the third spreadsheet within the too
Some of the toolkits contain Graphs and Tables which help illuminate the analytical concep
your answers in context. The Graphs and Tables automatically create themselves once data
You should avoid entering anything into the Graphs and Tables spreadsheet, as this may ove
that create the Graphs and Tables. The Graphs and Tables spreadsheets are contained in th
Excel Spreadsheet Models within the toolkit.
The final spreadsheet in each toolkit is this Toolkit Help page. You may refer to this guide if
understanding how to use the toolkit.
Important Note: All of the toolkits contain a prebuilt Excel model. Any changes you make to
once you save the file. To maintain the integrity of the prebuilt model, save the toolkit to you
are ready to run an analysis, open the toolkit file and immediately save it with another name
calculate your results.
Print
The Output Section, graphs, and tables can be printed by highlighting the desired print area.
The red celltip marker looks like this (see below); run your mouse over it to see how it works
Professor Thomas Steenburgh and Professor Jill Avery (Simmons School of Management) developed t
are developed solely as the basis for class discussion and are not intended to serve as endorsements,
or illustrations of effective or ineffective management.
Copyright 2010 President and Fellows of Harvard College. To order copies or request permission to
1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbs
of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitte
means --electronic, mechanical, photocopying, recording or otherwise -- without the permission of Harv
Quantitative Toolkit
How-To Guide
ate the quantitative analyses that you will use to guide your
sing on a particular type of quantitative analysis: