BSA CORE 2

MANAGEMENT SCIENCE

Module 7
Tuesday

BREAK-EVEN ANALYSIS

Components of Break-Even Analysis

The three components of break-even analysis are volume, cost, and profit.
o Volume is the level of sales or production by a company.
 It can be expressed as the number of units (i.e., quantity) produced
and sold, as the dollar volume of sales, or as a percentage of total
capacity available.

o Two type of costs are typically incurred in the production of a product:

fixed costs and variable costs.
 Fixed costs are generally independent of the volume of units
produced and sold.
 That is, fixed costs remain constant, regardless of how many
units of product are produced within a given range.
 Fixed costs can include such items as rent on plant and
equipment, taxes, staff and management salaries,
insurance, advertising, depreciation, heat and light, and plant
maintenance.
 Taken together, these items result in total fixed costs.

o Variable costs are determined on a per-unit basis.

 Thus, total variable costs depend on the number of units produced.
 Variable costs include such items as raw materials and resources,
direct labor, packaging, material handling, and freight.

o The total cost of an operation is computed by summing total fixed cost and
total variable cost or TC = TFC + TVC where TC = total cost; TFC = total
fixed cost; and TVC = total variable cost

Sources:
Taylor, Bernard W. III. Introduction to Management Science.
https://repository.dinus.ac.id/docs/ajar/01._Bernard_W_._Taylor_Introduction_to_Management_Scien
ce_11th_2013_.pdf
https://www.netsuite.com/portal/resource/articles/financial-management/break-even-analysis.shtml#
`
Example: Western Clothing Company
Western Clothing Company produces 400 pairs of denim jeans. The company incurs
variable cost of $8 per pair and fixed cost of $10,000.
Given:
TFC = $10,000
TVC = $8/pair x 400 pairs = $3,200
 Total cost
o TC = TFC + TVC
 where:
 TFC = total fixed cost
 TVC = total variable cost

o Using the data above

 TC = 10,000 + 3,200 = $13,200
Example: Western Clothing Company
Given:
Volume sold (Q) = 400 pairs of denim pants
Price (P) = $23 per pair
 Total revenue (TR)
o TR = P x Q
 where:
 P = price
 Q = quantity sold

o Using the data above

 Total revenue (TR) = $23/pair x 400 pairs = $9,200


Sources:
Taylor, Bernard W. III. Introduction to Management Science.
https://repository.dinus.ac.id/docs/ajar/01._Bernard_W_._Taylor_Introduction_to_Management_Scien
ce_11th_2013_.pdf
https://www.netsuite.com/portal/resource/articles/financial-management/break-even-analysis.shtml#
`
  Profit
o Profit is the difference between total revenue (volume multiplied by price)
and total cost.
 Profit = TR – TC
 where:
o TR = total revenue
o TC = total cost

Example: Western Clothing Company

Given:
Total revenue (TR) = $9,200
Total cost (TC) = $13,200
Profit = 9,200 – 13,200 = -$4,000

Break-Even Point Analysis

The break-even point is the volume that equates total revenue with total cost
where profit is zero.
o At the break-even point, where total revenue equals total cost, the profit is
equal to zero.
Break-even point volume (BEP)
BEP = FC__
P – VC

Where: FC = fixed cost

P = price
VC = variable cost

Profit at break-even point

o At break-even point, profit is zero.

Profit below break-even point

o Below break-even point, profit is negative.

Profit above break-even point

o Above break-even point, profit is positive.

Sources:
Taylor, Bernard W. III. Introduction to Management Science.
https://repository.dinus.ac.id/docs/ajar/01._Bernard_W_._Taylor_Introduction_to_Management_Scien
ce_11th_2013_.pdf
https://www.netsuite.com/portal/resource/articles/financial-management/break-even-analysis.shtml#
`
Example: Western Clothing Company
Given:
Price (P) = $23 per pair
Fixed cost (FC) = $10,000
Variable cost (VC) = $8 per pair

BEP = 10,000 = 666.7 pairs of denim jean

23 – 8

At break-even, profit is equal to zero

o TR = 666.6667 pairs x $23 per pair = $15,333.33
o TC = (666.6667 pairs x $8 per pair) + 10,000 = 15,333.33
 Profit = TR – TC = $15,333.33 - $15,333.33 = 0

Sources:
Taylor, Bernard W. III. Introduction to Management Science.
https://repository.dinus.ac.id/docs/ajar/01._Bernard_W_._Taylor_Introduction_to_Management_Scien
ce_11th_2013_.pdf
https://www.netsuite.com/portal/resource/articles/financial-management/break-even-analysis.shtml#
`