BREAK-EVEN ANALYSIS
A company manufactures bookcases that
Break-even analysis is a method
of determining costs exactly equal to
revenue. If the manufactured quantity is
less than the breakeven quantity, a loss
is incurred. If the manufactured quantity
is greater than the breakeven quantity,
a profit is incurred.
Break-even also refers to the
situation where the sales generated
(INCOME) is just enough to cover the
fixed and variable cost (EXPENSES) .The
level of production where the total
income is equal to the total expenses is
known as break-even point.
WORKING FORMULAS:
R = pN
C = f + aN
Where;
R = total revenue
p = incremental revenue or selling
price per unit
N = break-even point or quantity
produced and sold for break-
even
a = an incremental cost which is
the cost to produce one
additional item. It may also be
called the marginal cost or
differential cost.
f = fixed cost which does not vary
with production
C = total cost
Assuming there is no change in inventory,
the break-even point can be found from:
Cost, C = Revenue, R
f + aN = pN
N=
Example 2. Example 4.
Determine the break-even quantity per
sell 65.00 each. Annual operation month using the following data:
expenses is at 35,000.00 and production of Selling price per 600.00
one bookcase costs 50.00. How many unit
bookcases must be sold to avoid taking Monthly Expenses 428,000.00
losses? Labor Cost 115.00
Given: Cost of materials 76.00
fixed cost, f = 35,000.00 per annum Other variable 2.32
marginal cost, a = 50.00 costs
selling price per unit, p = 65.00 Given:
Required: break-even quantity
fixed cost, f = 428,000.00 monthly
Sol’n: marginal cost, a = 115+76+2.32 = 193.32
Assuming there is no change in inventory, selling price per unit, p = 600.00
the break-even point is: Required: break-even quantity
Example 1. Cost, C = Revenue, R Sol’n:
The cost of producing computer diskettes N = Assuming there is no change in inventory,
is as follows: material cost is 7.00 each, the break-even point is:
labor cost 2.00 each, and other expenses N = Cost, C = Revenue, R
is 1.50 each. If the fixed expenses is
N=
69,000.00 per month, how many diskettes N = 2,333.33 Ans.
must be produced each month for thus, the company needs to produce N=
breakeven if each diskette is worth 45.00? approximately 2,334 bookcases annually.
Given: N = 1,052.42 or 1053 pcs approx. Ans.
fixed cost, f = 69,000.00 monthly Example 3.
marginal cost, a = 7.00+2.00+1.50 = 10.50 A company that manufactures electric
selling price per unit = 45.00 motors has a production capacity of 200
Required: N = ? motors a month. The variable costs are
Sol’n: 150.00 per motor. The average selling
Assuming there is no change in inventory, price is 275.00. Fixed cost of the company
the break-even point is: is 20,000.00 per month which includes
N= taxes. The number of motors that must be
sold each month to break-even is closest
N= to:
N = 2,000.00 Ans. Given:
fixed cost, f = 20,000.00 monthly
Thus, the company needs to sell at least variable cost, a = 150.00
2,000 diskettes per month. selling price per unit, p = 275.00
Required: break-even quantity
Sol’n:
Assuming there is no change in inventory,
the break-even point is:
Cost, C = Revenue, R
N=
N=
N = 160 pcs Ans.