BREAK

EVEN
POINT
Analysis
 Definition
A decision-making aid that enables a
manager to determine whether a
particular volume of sales will result in
losses or profits
A way to calculate when a project will
be profitable by equating its total
revenues with its total expenses
 Uses
✖ C-V-P analysis is an important tool in
terms of short-term planning and
decision making
✖ It looks at the relationship between
costs, revenue, output levels and profit
✖ Short run decisions where C-V-P is
used include choice of sales mix,
pricing policy etc.
 Revenue

P (X) = F + V (X)
Total costs

WHERE:
F = FIXED COSTS
X = VOLUME OF OUTPUT (IN UNITS)
V = VARIABLE COSTS
P = PRICE PER UNIT
 CONTRIBUTION MARGIN

✖ Determines the sales

amount left over after
adjusting for the
variable costs of
selling additional
products
 Contribution margin = p-v

Where:
P = Price per product
V = Variable cost per product
 EXAMPLE
Company XYZ sells a product for $100 each. The
company incurs a unit variable direct material
expense of $12, unit variable labor of $25, $10 of
variable overhead per unit and $8 of fixed overhead
per unit
= Sales price – Variable Costs
= $100 – ($12 + 25 + 10)
= $53

*$8 (Fixed overhead) is not included it it’s a fixed cost

 Break even point
✖ Defined as that point of sales volume at
which total revenue = total cost
✖ Point of no profit, no loss

Sales revenue at BEP = FC + VC

BEP ANALYSIS DIAGRAM
 Diagram presentation of bep
analysis
Example: You run a manufacturing business that is
involved in manufacturing and selling a single product.
The annual fixed expenses to run the business are
$15,000 and variable expenses are $7.50 per unit. The
sale price of your product is $15 per unit.

Solution: Total fixed expenses / Contribution margin per unit

= 15,000 / 7.5*
= 2,000 units
Break-even point in dollars
= (2,000 units) × ($15)
= $30,000
 Explanation of the graph
1. The number of units have been presented on the X-axis
(horizontally) where as dollars have been presented on Y-axis
(vertically).
2. The straight line in red color represents the total annual fixed
expenses of $15,000.
3. The blue line represents the total expenses. Notice that the line has
a positive or upward slop that indicates the effect of increasing
variable expenses with the increase in production.
4. The green line with positive or upward slop indicates that every unit
sold increases the total sales revenue.
5. The total revenue line and the total expenses line cross each other.
The point at which they cross each other is the break-even point.
Notice that the total expenses line is above the total revenue line
before the point of intersection and below after the point of
intersection. It tells us that the business suffers a loss before the
point of intersection and makes a profit after this point. The break-
even point in the above graph is 2,000 units or $30,000 that agrees
with the break-even point computed using equation and contribution
margin methods above.
 Explanation of the graph
6.The difference between the total expenses line and the total revenue
line before the point of intersection (BE point) is the loss area. The loss
area has been filled with pink color. Notice that this area reduces as the
number of units sold increases. It means every additional unit sold before
the break-even point reduces the loss.
7. The difference between the total expenses line and the total revenue
line after the point of intersection (BE point) is the profit area. The profit
area has been filled with green color. Notice that this area increases as
the number of units sold increases. It means every additional unit sold
after the break-even point increases the profit of the business.
Calculation
Of Break
even point
 BREAK-EVEN
SALES VOLUME
✖ Is the amount of product that you will need
to produce and sell to cover total costs of
production or in other words, to break
even.
#1 In units (vol. of production)

= Total Fixed Cost_________

Selling Price per unit - VC
per unit

= Total Fixed Cost_________

Contribution Margin
 PROVING:
1. Determine gross income
= sales price x sales quantity

2. Determine total variable costs

= variable cost/unit x sales quantity

3. Compute return over total v costs

= Gross income (1) – total variable cost (2)

4. Compute return over all costs (should = 0)

= return over v costs (3) – total fixed costs
S
 EXAMPLE
Yu Enterprises produces boxes for Nature Spring, sold at
$40 per pack. Their total fixed cost is $50,000and their
variable cost per unit is $30

= Total Fixed Cost_________

Selling Price per unit - VC per unit
= $50,000
$40 -30
= 5,000 units
 BREAK-EVEN SALES
REVENUE
✖ the amount of money the business
generates from the sale of the break-
even quantity.
#2 In value(Sales revenue)

= Fixed Cost________ x Sales

Contribution Margin per Unit

Fixed Cost___ Contribution

Contribution Margin Sales
Ratio
 EXAMPLE
Salazar Inc. has a product, which is sold at $21 per unit.
The variable cost per unit is $14, fixed cost per unit is
$0.70 at the budgeted production level of 3,000 units

Break even (sales revenue)

= Total Fixed Cost___
Contribution Ratio
= $0.70 x 3,000 units
($21-$14)/$21
= $63,000
 EXAMPLE
Salazar Inc. has fixed expenses of $100,000 per year. Its
variable expenses are approximately 80% of sales. This
means that the contribution margin ratio is 20%.

**(Sales minus the variable

Break even (sales revenue) expenses of 80% of sales
= Total Fixed Cost___ leaves a remainder of 20%
of sales. In other words,
Contribution Margin after deducting the variable
Ratio expenses there remains
only 20% of every sales
= $100,000 dollar to go towards the
20% fixed expenses and profits. )
= $500,000
 #3 In PERCENTAGE
(PLANT CAPACITY)

= Break Even points in units x 100%

Capacity for period
= Total Fixed Cost/Contribution Margin x
100%
Capacity for period
 EXAMPLE
Kathryn Bernado Corporation breaks even whey they
make 65 pairs of shoes. The capacity per period is 100
pairs of shoes. Calculate the breakeven point as a
percentage of capacity

= Break Even points in units x 100%

Capacity for period
= 65 x 100
100
= 0.65 or 65%
#4 In minimum acceptable
price

= Total fixed cost_____ + Variable cost

per unit
Production unit volume
 EXAMPLE
ABC International wants to enter the market for yellow one-
sided widgets. The fixed cost of manufacturing these
widgets is $50,000, and the variable cost per unit is $5.00.
ABC expects to sell 10,000 of the widgets. Therefore, the
break even price of the yellow one-sided widgets is:

= ($50,000 fixed costs/ 10,000 units) + $5 variable cost

= $10 break even price
* Assuming that ABC actually sells 10,000 units in the period, $10 will be
the price at which ABC breaks even. If they sell fewer units, they would
incur a loss, because the price point does not cover the fixed costs. Or , if
they were to sell more units, it would earn a profit, because the price
costs covers more than the fixed costs
 LIMITATIONS
Assumes that sale prices are
constant at all levels of output
Assumes production &
sales are the same
Break even charts may be time
consuming to prepare
It can only apply to a single product
or single mix of products
 Seatwork
Mercedes-Benz is expecting to
sell 250,000 cars next month;
Selling price/unit $8,000
based from the given table,
calculate the ff: Variable cost/unit $2,000
(a) Contribution Margin
Fixed cost/unit $200
(b) Break even point in units
(c) Break even point in sales Total fixed cost $200,000
value
Capacity 1,000 units
(d) Break even in percentage
(e) At what price will they
break even?
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