Module 5
BREAK-EVEN ANALYSIS
Nacel C. Altizon
Engineering Economy-BSCE 3
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.
Sample Problems on
Break Even Analysis
1. An entrepreneur at the location in the United
States is planning to enter the gourmet soy-based
burger market. The forecast expected unit sales of
200,000 burgers in 18 months. The variable cost
for making one burger is $0.85 and the fixed cost
of making burgers for 18 months will be a total of
$165,000 which covers for the rent, phone bill,
and insurance coverage – these items tend not to
vary in amount per month over the term of one
year. The best estimate of what the average
consumer will pay for the soy burger is $1.95. How
many burgers will he have to sell to break even?
Sample Problems on
Break Even Analysis
2. Toyota Motor Phils. Corporation Sta.
Rosa Plant has a production capacity
of 700 cars per month and its fixed cost
is Php100,000,000 monthly. The variable
cost per car is Php300,000 and each
car can be sold for Php650,000. Due to
cost reduction program, fixed cost will
be reduced to 10% and variable cost by
20%. Determine the new and old break
break-even point.
Sample Problems on
Break Even Analysis
3. A farmer wants to buy a new
combine rather than hire a custom
harvester. The total fixed costs for the
desired combine are $21,270 per
year. The variable cost (not counting the
operator’s labor) are $8.75 per hour. The
farmer can harvest 5 acres per hour. The
custom harvester charges $16.00 per
acre. How many acres must be harvested
per year to break-even?
