BREAK-EVEN

ANALYSIS
What is Break Even Analysis?
Break Even Analysis in economics, business,
and cost accounting refers to the point in

which total cost and total revenue are equal. A

break even point analysis is used to determine
the number of units or revenue needed to
 Formula for Break Even Analysis
Break even quantity = Fixed costs / (Sales price per unit – Variable cost per unit)
 

Where:

Fixed costs are costs that do not change with varying output (i.e. salary, rent, building
machinery).
Sales price per unit is the selling price (unit selling price) per unit.
Variable cost per unit is the variable costs incurred to create a unit.
 
 Example of Break Even Analysis
Colin is the managerial accountant in charge of Company A, which sells
water bottles. He previously determined that the fixed costs of Company
A consist of property taxes, a lease, and executive salaries, which add up
to Php100,000. The variable costs associated with producing one water
bottle is Php 2 per unit. The water bottle is sold at a price of Php 12. To
determine the break even point of Company A’s water bottle:
 
Break even quantity = FC / (USP – UVC)
= Php100,000 / (Php12 – Php2) = 10,000
 Cont…
Therefore, given the fixed costs, variable costs,
and selling price of the water bottles, Company
A would need to sell 10,000 units of water
bottles to break even.

 
 Graphically Representing the Break Even Point

The graphical representation of unit sales and dollar sales needed to break even is referred to as the Break
even chart or CVP graph. Below is the CVP graph of the example above:
Explanation
1. The number of units on the X-axis and the peso amount is on the Y-axis
2. The red line represents total fixed costs of Php 100,00
3. The blue line represents revenue per unit sold. For example, selling of
10,000 units would generate 10,000 x Php12 = Php 120, 000 in revenue.
4. The yellow line represents total costs (fixed and Variable costs). For
example, if the company sells 0 units, the company would incur Php0 in
variable costs but Php 100,000 in fixed costs for a total costs of Php
100,000.
If the company sells 10,000 units, the company would incur _______ x
Php ____ = Php___________ variable costs and Php ___________in fixed
costs for a total of ________________________
Concept of Break-even point

Profit when Revenue Total Variable Cost + Total Fixed Cost

Break-even point when Revenue = Total Variable cost + Total Fixed Cost

Loss when revenue  Total Variable cost + Total Fixed Cost

Sample Problem #1

Lets say you own a business selling burgers

It costs Php 7 to make one burger

You sell each burger for Php 12.00

Your cost for rent, utilities, overhead, etc is Php 100,000 per month

How many burgers do you need to sell to break-even?

SOLUTION

Break even quantity = FC / (USP – UVC)

= Php100,000 / (Php12 – Php7)
= Php 100,000 / 5
= 20, 000
To Check your answer :
(breakeven qty: 20,000)
To check your answer:
BREAKEVEN COST = Total FC + Total Variable cost
= 100,000 + ( 7 x 20,000)
= 100,000 + 140,000
= Php 240, 000

BREAKEVEN SALES = total units x Selling price

= 20, 000 x Php 12
= Php 240, 000