How do you know when you'll make a profit? Jim and Kay Stice explain the ins and outs of breakeven analysis and cost-volume-profit analysis, and what it means for your business.
- Hi, I'm Jim Stice, I'm a professor of accounting at Brigham Young University. This is my brother Kay. - I'm also a professor of accounting at Brigham Young University. - In this course, we will discuss the basics of breakeven analysis. - In a business, there are two kinds of costs, fixed cost and variable cost. - A fixed cost is fixed. It's one that's the same, no matter how many customers you have. In a restaurant, for example, a fixed cost is the rent on the building. The rent is the same whether 10 people come to your restaurant or 1,000 people come.
- A variable cost is one that increases as you have more customers. In a restaurant, an example of a variable cost is the cost of the food. If you have 1,000 customers, you have to spend twice as much on buying the food ingredients as if you have 500 customers. - In this course, we will talk about breakeven analysis. How many customers need to come to a restaurant each day for the owner to at least breakeven? - This type of analysis is important for every small business entrepreneur who is considering putting her or his life savings at risk and opening a new business.
Given the number of customers that can be reasonably expected, is the profit per customer large enough to pay for the fixed cost of the business? - Some simple breakeven calculations can counteract the natural overoptimism of entrepreneurs and reduce the chances that an entrepreneur will lose her or his life savings. - Now, before taking this breakeven analysis course, you might consider taking our Accounting Fundamentals course. Among other things, that course introduces you to the basics of all three types of accounting, managerial, financial, and income taxes.
- Now with that said, we've designed this breakeven analysis course to be self-contained, and we carefully explain any terminology that we use. - In short, this is an introductory course with no prior accounting knowledge necessary. So, here's a breakeven question. How many people need to visit a typical McDonald's restaurant location in order for that location to breakeven? 10 per hour, 1,000 per hour? What do you think? - I don't know. - That's the kind of question we're going to address in this course.
Want to learn more? Learn about three types of accounting—financial, managerial, and income tax—in their Accounting Fundamentals course.
- Breaking down fixed and variable costs
- Pricing a service to cover costs
- Identifying high contribution margins
- Calculating a company's breakeven point
- Conducting breakeven analysis with breakeven equations
- Computing target net income
- Exploring sensitivity analysis