BREAKEVEN ANALYSIS (SAMPLE PROBLEMS)

1. A factory engaged in the fabrication of an automobile part with a production capacity of 700,000
units per year is only operating at 62% of capacity due to unavailability of the necessary foreign
currency to finance the importation of their raw materials. The annual income is P430,000.00.
Annual fixed costs are P 190,00.00 and variable costs are P 0.348 per unit. What is the breakeven
point?
Solution:
Let x = number of units to breakeven
Solving for the expenses:
Variable cost = 0.348x
Fixed cost = 190,000

0.348
Total expenses = ( )(434,000 units) + 190,000
unit
Total Expenses = 341, 032

Total income = 430,000

430,000
Selling Price = = 0.991 per unit
434,000

Total income = 0.99x

To breakeven:
Income = Expenses
0.991x = 0.348x + 190,000
0.643x = 190,000
x = 295,490

∴The current breakeven point is 295, 490

 2. A telephone switchboard 100 pair cable can be made up with either enameled wire or
tinned wire. There will be 400 soldered connections. The cost of soldering a connection
on the enameled wire will be P 1.65, on the tinned wire, it will be P 1.15. A 100-pair
cable made up with enameled wire cost P 0.55 per linear foot and those made up of
tinned wire cost P 0.75 per linear foot. Determine the length of cable run in feet so that
the cost of each installation would be the same.
Solution:
For enameled wire:
Let x = length of wire
Cost of wire = 0.55x
Cost of soldering = 1.65(400) = 660

Total cost = 0.55x + 660

For tinned wire:

Let x = length of wire

Cost of wire = 0.75x

Cost of soldering = 1.15(400) = 460

Total cost = 0.75x + 60

In order to get the length of wire that will give the same cost, equate total cost of enameled wire
and total cost of tinned wire.

0.55x + 660 = 0.75x + 660

0.2x = 2000
x = 1, 000

∴The length of cable to make cost installation the same is 1,000 feet.
 3. A local factory assembling calculators produces 400 units per month and sells them at P
1, 800 each. Dividends are 8% on the 8,000 shares with par value of P 250 each. The
fixed operating cost per month is P 1,000 per unit. If 200 units were produced per month,
determine the profit or loss.

Solution:

Let x = number of calculators produced per month to break-even

0.08
Expenses = 1,000x + 25,000 + 8,000(250) ( )
12
Expenses = 1,000x + 38,333.33
Income = 1,800x

To breakeven
Income = Expenses

1,800x = 1,000x + 38,333.33

800x = 38,333.33
x = 47.92 ≈ 48 units

If 200 units are produced per month, there will be profit since it needs only 48 units to break-
even.

Solving for profit:

Income = 200(1,800) = 360,000

Expenses = 1,000 (200) + 38,333.33

Expenses= 238,333.33

Profit = Income – Expenses

Profit = 360,000 – 238,333.33
Profit = 121,666.674

∴There is a profit of P 121,666.67.

 4. In steel fabrication shop located somewhere in Cebu, various size rivet holes must be
made in structural members. This may be done by laying out the position of the hole on
the members and using a drill press for this method, a machinist wage rate is P 20.25 per
hour and he can drill 27 holes per hour. An alternative method is by the use of the
multiple punch machine. In this process, the machinist wage rate is P 20.00 per hour and
he can complete 8 holes per minute. This method requires P 0.50 per holes to set multiple
punch machine and an installation cost of P 2,000.00. If all other costs are the same, for
what number of rivet holes will the multiple punch machine pay for itself?

Solution:

Using first method, the Drill Press:

20.25
Cost of machinist per hole =
27
Cost of machinist per hole = 0.75

Using the second method, the Multiple Punch Machine:

20
Cost of machinist per hole =
8(60)
Cost of machinist per hole = 0.0417

Additional cost for setting up the machine per hole = 0.50

Additional cost = 2,000.00

Let n = number of rivets holes that will make the multiple punch machine pay for itself
Total cost using drill press = total cost using multiple punch machine

0.75n = 0.0417n + 0.50n + 2000

0.75n = 0.5417n + 2000
0.2083n = 2000
n = 9601.54 holes

Say n = 9601 holes

∴The number of rivet holes for the multiple-punch machine to pay for itself is 9,601.
 5. An item which can be sold for Php 63.00 per unit wholesale id being produced with the
following cost data:
Labor cost = P 10.00 per unit
Material cost = P 15.00 per unit
Fixed charges = P 10,000.00
Variable cost = P 8.00 per unit

What is the breakeven point sales volume if one out of every 10 units produced is
defective and is rejected with only full recovery on materials?

Solution:

Let x = number of units produced per month to breakeven

Expenses:
Labor cost = 10x
Material cost = 15x
Variable cost = 8x
Fixed charges = 10,000

Total expenses = 10x + 15x + 8x + 10,000

Total expenses = 33x + 10,000

Total income = 63x

To breakeven:
Total income = total expenses
63x = 33x + 10,000
30x = 10,000
x = 333.33 say 334 units

P 63
Breakeven sales volume = ( ) (334 units)
unit
Breakeven sales volume = P 21,042

Material cost that

If 1 out of 10 (10%) is defective and rejected: is recovered
Number of units sold per month = 0.90x

Total expenses = 10x + 15x + 8x + 10,000 – 15(0.10x)

Total expenses = 31.5x + 10,000
Total income = 63(0.90)x
= 56.7x

To breakeven:

Total income = total expenses

56.7x = 31.5x + 10,000
25.2x = 10,000
x = 396.8 say 397

P63
Breakeven sales volume = ( ) (397 units)
unit
Breakeven sales volume = P 25,011

∴Therefore, the breakeven sales volume is Php 25,011.00