Breakeven analysis in Engineering Economics

The following discussion agenda is on Breakeven analysis (BEA) in Engineering Economics (EE):

1. Basic concetps related to BEA
• Profit, variable costs and fixed costs
2. Linear Break-even analysis (BEA)
• Break-even charts (re: Figure 12.3 of Riggs et al. (1998; pg 478).)
• Algebraic relationships
• Breakeven Point Alternatives (re: Figure 12.5 of Riggs et al. (1998; pg 482).)
• On dumping (re: Figure 12.7 of Riggs et al. (1998; pg 484).)
• Multiproduct Alternatives
• Multiple Alternatives
3. Nonlinear Break-even analysis
• Marginal revenue and profit
• Nonlinear break-even charts (re: Figure 12.12 of Riggs et al. (1998; pg 491).)
• Marginal cost  and average unit cost
4. Effects of inflation on break-even analysis

Some related notions in cost accounting:

Diagram 1: Cost behaviour

Diagram 2: Breakeven chart:

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A case study on Break-even analysis:

Mr Wong sells Pineapple computers in his shop. The selling price of the computer is $4,500 per unit and its product cost is $3,000 per unit. Mr Wong needs to incur a fixed cost of $50,000 per month.

Question 1: How many computers does Mr Wong have to sell per month in other to break even (ie not to lose money for his business)?

Question 2: If Mr Wong has a targeted yearly profit of $36,000, how many computers does Mr Wong have to sell in order to achieve his profit target?

Question 3: If the product cost of Pineapple computer increases by 10%, how many additional computers does Mr Wong have to sell in order to break even?

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References

1. Riggs, J.L., Bedworth, D.D. and Randhawa, S.U. (1998) "Chapter 12: Breakeven Analysis" in Engineering Economics, McGraw-Hill
2. Cost-volume-profit analysis: http://en.wikipedia.org/wiki/Cost-Volume-Profit_Analysis
3. Break-even analysis: http://en.wikipedia.org/wiki/Break-even_analysis