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Session xxxx

Time-Based Versus Quantity-Based Breakeven Analysis

Robert C. Creese Ph.D., PE, CCE Industrial and Management Systems Engineering Department College of Engineering and Mineral Resources West Virginia University

Introduction

Breakeven analysis has traditionally focused upon quantity-based breakeven analysis, which determines the production quantity at the specific breakeven point. This has worked for marketing, sales, and top-management for planning yearly goals, but it provides little assistance at the plant management level where the production quantity is not a variable, but it is a quantity specified by the customer. The production or manufacturing manager can control the time to produce the orders, but the manager cannot control the quantity as that is controlled by the customer. Time-based breakeven analysis is a relatively new concept1-3 compared to the quantity-based breakeven analysis.

Two critical issues in breakeven analysis are the cost base used and the breakeven point used. Although the most frequently used breakeven point is the breakeven point at cost, three other breakeven points considered are the shutdown point, the breakeven at required return point, and the breakeven at required return after taxes. These points can be considered on either the quantity-based breakeven analysis or on the time-based breakeven analysis..

The selection of a cost base determines how a particular cost is considered with respect to being fixed, semi-variable or variable. If the cost base is quantity, then a cost item such as material cost would be considered as variable because when the production quantity increases, the total material costs would increase. If the cost base is time and the total production quantity is fixed, then the amount of materials used would be fixed and the material cost would be considered as a fixed cost.

Breakeven Points

The four breakeven points can be evaluated on either the quantity-based system or the time-based system. The four breakeven points are defined as:

1. Shutdown Point(SD) In the production quantity system, the shutdown point is the production quantity at which the revenues equal the sum of the variable and semi- “Proceedings of the 2004 American Society for Engineering Education Annual Conference and Exposition Copyright  2004 American Society for Engineering Education”

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Creese, R. (2004, June), Time Based Breakeven Analysis Paper presented at 2004 Annual Conference, Salt Lake City, Utah. 10.18260/1-2--13416