FINAMAN

Lecture 4 – Breakeven Analysis

DR. FREDERICK A. HALCON

Lecturer
1
 Breakeven Analysis
Also known as cost-volume-profit (CVP)
analysis
Considers the relationships between a
firm’s sales, fixed and variable operating
costs and EBIT at various output levels

Module 13 - Basics of financial management 2

 Breakeven Analysis
Breakeven Point
 The point where total revenue is enough to
cover total costs
Total revenue (TR = PQ)
 Price times quantity sold
Total cost (TC = FC + VC)
 The sum of fixed and variable costs
 Breakeven Analysis
Fixed costs
 Costs incurred whether production takes
place or not
• Ex: rent, insurance, depreciation,
salaries
Variable costs
 Costs that vary directly with the production
level
• Ex: direct materials and direct labor
 Breakeven Analysis
Contribution Margin
 The difference between the selling price
per unit and the variable cost per unit

NOTE:
BREAKEVEN QUANTITY = FC / CM in Pesos
BREAKEVEN SALES = FC / CM in %
Breakeven Analysis
Contribution Margin
Income Statement

7
Sample Problem: Do as
indicated.
Nelly’s footwear sells athletic shoes at
P800 a pair. Fixed costs are P120,000
and variable costs amount to 50% of the
selling price.
 Setup the total revenue, fixed cost and total cost
functions.
 How many pairs of shoes must be sold to recover
fixed costs?
 Find the breakeven point (breakeven peso sales
and breakeven quantity) algebraically and by the
contribution margin income statement.
 Draw the breakeven chart.
Sample Problem: Do as
indicated.
XYZ Corporation has calculated that it has fixed costs
that consist of its lease, depreciation of its assets,
executive salaries, and property taxes. Those fixed
costs add up to $60,000. Their product is the widget.
Their variable costs associated with producing the
widget are raw material, factory labor, and sales
commissions. Variable costs have been calculated to
be $0.80 per unit. The widget is priced at $2.00 each.

 Determine the breakeven sales and quantity.

 Draw the breakeven chart.
 Label and show the profit region.
 Construct the contribution margin income statement.
 Sample Problem: Do as
indicated.
A company wants to begin selling a new pair of hand-held pliers in the upcoming fiscal  
year. They want to know how many hand-held pliers they will have to sell in order to  

break-even on this investment in materials and equipment. They received the following  
data from the chief financial officer:          
                
                
  Fixed costs            
  Metal molding machine: $100,000        
  Plastic grip molder: $25,000        
  Sander:     $5,000        
                
  Variable costs (per unit)          

  Packaging material: $1.00        

  Raw material   $1.00        
  Grip material:   $0.50        
  Shipping   $0.50        
                
                
The marketing department estimates that they can sell their new pliers for    
$15.00 per unit. They further project that they will average 1200 units    
per month.             

Determine the breakeven quantity and breakeven dollar sales. Create a breakeven
chart. How much is the profit/loss if they sell 1200 units per month?
 Sample Problem: Do as
indicated.
TUV Enterprises incurs a variable
expense for Product A of Php0.63/unit
and a variable labor expense of
Php2.02/unit.
 What is the total variable cost per unit?
 If fixed expenses is Php415,000 per year in which total production is 250,000, what
are the total expenses for the year?
 If selling price is Php5.50 per units, will TUV breakeven? Justify your answer.
 What is the breakeven peso sales and volume?
 If fixed expenses rises to Php500,000 and direct labor changes to Php4.00 but direct
material falls to Php0.50 cents , what will be the new breakeven peso sales and
volume?

Module 13 - Basics of financial management 11

 Sample Problem: Do as
indicated.
OKAY Company is attempting to develop and market a new
garden tractor. Fixed costs to develop and produce the new
tractor are estimated to be $10M per year. The variable cost to
make each tractor has been estimated to be $2000. The
marketing research department has recommended a price of
$4000 per tractor.
 What is the breakeven level of output for the new tractor.

 If management expects to generate a profit target of

$2000000, how many must be tractors must be sold?

Module 13 - Basics of financial management 12