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Gross Margin Factor in Break-Even Analysis

Break-even analysis estimates the sales level needed for a business to cover total expenses, with the break-even point being where revenues equal expenses. Key factors include fixed and variable costs, as well as contribution margin, and methods to lower the break-even point involve reducing costs or increasing prices. While advantageous for understanding cost-volume-profit relationships, it has limitations such as being best suited for single product analysis and challenges in classifying costs.

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49 views10 pages

Gross Margin Factor in Break-Even Analysis

Break-even analysis estimates the sales level needed for a business to cover total expenses, with the break-even point being where revenues equal expenses. Key factors include fixed and variable costs, as well as contribution margin, and methods to lower the break-even point involve reducing costs or increasing prices. While advantageous for understanding cost-volume-profit relationships, it has limitations such as being best suited for single product analysis and challenges in classifying costs.

Uploaded by

jamilramos0808
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

BREAK-EVEN ANALYSIS

Definition of Terms
➢ Break-Even Analysis – it involves estimating the
level of sales necessary to operate a business on
a break-even basis.
➢ Break-Even Point (BEP) – is defined as the point
where sales or revenues equal total expenses.
➢ Break-Even Margin – is a ratio that shows the
gross-margin factor for a break-even condition.
The formula is total expenses divided by net
revenues multiplied by 100 to get a percentage.
Break-Even Graph
Break-Even Chart – shows the graph of fixed cost,
variable cost and expected income from sales for
different production levels.
Ways to Lower the
Break-Even Point

➢ Lower direct costs, which


will raise the gross margin.
➢ Exercise cost controls on
your fixed expenses, and
lower the necessary total
expenses.
➢ Raise prices.
Key Break-Even Factors
➢ Fixed Costs – these costs remain constant (or nearly so)
within the projected range of sales levels. These can
include facilities costs, certain general and administrative
costs, and interest and depreciation expenses.
➢ Variable Costs – these costs vary in proportion to sales
levels. They can include direct material and labor costs, the
variable part of manufacturing overhead, and
transportation and sales commission expenses.
➢ Contribution Margin – this is equal to sales revenues less
variable costs. This amount is available to offset fixed
expenses and (hopefully) produce an operating profit for
the business.
Appraisal of Break-Even Analysis
Advantages of Break-Even Analysis
➢ It points out the relationship between cost,
production volume and returns.

Limitations of Break-Even Analysis


➢ It is best suited to the analysis of one product at
a time.
➢ It may be difficult to classify a cost as all variable
or all fixed.
➢ There may be a tendency to continue to use a
break-even analysis after the cost and income
functions have changed.
Break-Even Analysis

To Break-Even

Total Income= Total Expenses


Income= Variable Cost + Fixed Cost
Profit = Income –(Variable Cost+ Fixed Cost)
Loss = (Variable Cost + Fixed Cost)- Income
Sample Problems on
Break Even Analysis
1. XYZ corporation manufactures bookcases
that it sells for P65.00 each. It cost to
produce one bookcase is P50,000, how
many cases must be sold each year for XYZ
to avoid taking a loss?
Sample Problems on
Break Even Analysis

2. A company which manufactures electric


motors has a production capacity of 200
motors a month. The variable cost are
P150.00 per motor. The average selling
price of the motor is P275.00. Fixed cost
of the company amount to P20,000 per
month which include taxes . Find the
number of motors that must be sold each
month.
Sample Problems on
Break Even Analysis

3. A factory is running 80% efficiency with


a fixed cost of P78,000, variable cost
per unit of P130.00, selling price per
unit of P416.00, and production
capacity of 5000 units. What is the
current profit of the factory if all
products manufactured are sold?

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