Breakeven and Sensitivity

Breakeven analysis is an examination of costs and income of a business showing what needs to be achieved to ensure that revenue costs are equal to revenue income - Breakeven Point (i.e. so no loss is incurred) - and what additionally may need to happen to achieve a profit/surplus of revenue income over revenue costs.

Similarly, a sensitivity analysis allows the different elements of the costs and income of a business to be manipulated to see what the financial impact might be.

As part of the work of compiling revenue projections it is possible to use breakeven and sensitivity analysis to consider both the impact of financial risks and to provide an input into decision making about the price that should be set for the services or products of the business or the level of performance required (levels of occupancy, numbers of bookings etc) to ensure that the venture does not start making a loss.

Breakeven Point - an example

A development trust called "Offices 'r' Us" is planning to bring to market 10 new single office units in an old converted school. The following shows fixed and variable costs that are associated with the project.

Cost item 

£ 

Fixed costs (annual): 

 

Mortgage interest payments on loan to convert the school 

30,000 

Business rates 

2,000 

Caretaker salary 

14,800 

Building insurance 

4,000 

Lift maintenance 

1,200 

Variable Costs: 

 

Heat and Light Standing charge per unit quarterly 

20 

Heat and light usage charge per unit quarterly 

130 

Telephone and internet costs per unit 

370

Cleaning costs per unit (weekly) 

10 

Each office is being marketed at an all inclusive cost of £200 per week
What is the breakeven point? (i.e. how many units must be occupied to make the venture break even?)

Answer

Fixed costs per annum

£52,000

Variable costs per unit per annum

(£20x4 + £130x4 + 370x4 + 10x52)
The x 4 multiplier is for quarterly variable costs and the 52 multiplier for weekly costs

£2,600

Total Contribution per unit per annum

(£200 per week x 52 weeks = £10,400 per annum - £2,600 = £7,800)

£7,800

Total Number of Units = 10

 

Breakeven point = Fixed Costs (£52,000) Contribution per unit (7,800) = 6.6 units

So 7 units need to be occupied (a 70% occupancy rate given that there are 10 units) for breakeven point to be reached.

 

Related Resources

Breakeven Point - An Example

An example of a breakeven analysis to ensure that revenue costs are equal to revenue income - Breakeven Point (i.e. so no loss is incurred) - and what additionally may need to happen to achieve a profit/surplus of revenue income over revenue costs.

Microsoft Office document icon Breakeven Point - An Example