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Figure 2: State Transition Diagram
1999 Systems Engineering Capstone Conference • University of Virginia
BREAKEVEN ANALYSIS
Breakeven analysis is a technique used to examine
the relationship between a business’s
fixed costs, variable costs, and revenues
at various levels of output to determine
the combination of elements that achieve
the breakeven point. At the breakeven
point, revenue equals total costs;
revenues generated just cover operating
costs and the business is realizing neither
financial gain nor loss.
Breakeven
Analysis compares a business venture’s
operating revenues to its operating
expenses both directly and indirectly in
the form of fixed and variable costs.
Breakeven analysis determines the efficiency of
current business operations as well as profitability and
risk associated with pursuing new business ventures, all
in terms of the existing cost structure and expected
revenue generation. Subsequently, it outlines the
conditions necessary for a new program to realize a
profit.
Breakeven analysis indicates the following:
The unit volume level that must be achieved in
order to breakeven
How much profit
will be made at any given level
of unit volume
How price and revenue generation changes affect
profitability
How reducing expenses in different areas of the
company’s cost structure will impact profits,
improving financial performance
Identification of the breakeven point determines
what, if any changes to make in the cost structure to
improve financial performance (Newkirk, 2).
Breakeven Model
This method is used to measure the performance of
the current collections process, and establish a control
to measure future processes against.
An Excel model
provides both computational and graphical means of
performing the analysis.
Providian’s fixed and variable
costs were identified and used as model inputs. The
infrastructure used to contact customers and encourage
them to pay their debts is operationally very expensive.
Receiving payment, as well as assessing fees and
interest on delinquent accounts, generates revenues.
Modeling Results
Providian currently is operating well above its
calculated breakeven point as can be seen in
Figure 3
,
the graph produced based on the results of the
breakeven analysis. Providian is not only able to cover
its operating expenses; it makes considerable profit.
The shear size difference in the profit and loss regions
illustrates how successful Providian’s operations and
cost structures are currently functioning. While
Providian’s performance is impressive, it is by no
means the limit to what it can achieve. A large number
of calls results in a higher amount of dollars collected,
and Providian operates above its breakeven point and
therefore makes profit. A much lower amount of calls
however can result in Providian collecting a much
fewer dollars. The call volume can be so low that
Providian is not able to collect enough money to remain
profitable. At this level the company operates below
their breakeven point, and therefore suffers losses.
