Module 5
BREAK-EVEN ANALYSIS
Engr. Gerard Ang
School of EECE
Definition of Terms
 Break-Even Analysis – it involves estimating the
level of sales necessary to operate a business on
a break-even basis.
 Break-Even Point (BEP) – is defined as the point
where sales or revenues equal total expenses.
 Break-Even Margin – is a ratio that shows the
gross-margin factor for a break-even condition.
The formula is total expenses divided by net
revenues multiplied by 100 to get a percentage.
Break-Even Graph
Break-Even Chart – shows the graph of fixed cost,
variable cost and expected income from sales for
different production levels.
Ways to Lower the
Break-Even Point
 Lower direct costs, which will raise the
gross margin.
 Exercise cost controls on your fixed
expenses, and lower the necessary
total expenses.
 Raise prices.
Key Break-Even Factors
 Fixed Costs – these costs remain constant (or nearly so)
within the projected range of sales levels. These can include
facilities costs, certain general and administrative costs, and
interest and depreciation expenses.
 Variable Costs – these costs vary in proportion to sales
levels. They can include direct material and labor costs, the
variable part of manufacturing overhead, and transportation
and sales commission expenses.
 Contribution Margin – this is equal to sales revenues less
variable costs. This amount is available to offset fixed
expenses and (hopefully) produce an operating profit for the
business.
Appraisal of Break-Even Analysis
Advantages of Break-Even Analysis
 It points out the relationship between cost, production
volume and returns.
Limitations of Break-Even Analysis
 It is best suited to the analysis of one product at a time.
 It may be difficult to classify a cost as all variable or all
fixed.
 There may be a tendency to continue to use a break-even
analysis after the cost and income functions have
changed.
Sample Problems on
Break Even Analysis
1. An entrepreneur at the location in the United States is
planning to enter the gourmet soy-based burger market.
The forecast expected unit sales of 200,000 burgers in 18
months. The variable cost for making one burger is $0.85
and the fixed cost of making burgers for 18 months will be
a total of $165,000 which covers for the rent, phone bill,
and insurance coverage – these items tend not to vary in
amount per month over the term of one year. The best
estimate of what the average consumer will pay for the soy
burger is $1.95. How many burgers will he have to sell to
break even?
Sample Problems on
Break Even Analysis
2. Toyota Motor Phils. Corporation Sta. Rosa Plant has
a production capacity of 700 cars per month and its
fixed cost is Php100,000,000 monthly. The variable
cost per car is Php300,000 and each car can be sold
for Php650,000. Due to cost reduction program, fixed
cost will be reduced to 10% and variable cost by 20%.
Determine the new and old break break-even point.
Sample Problems on
Break Even Analysis
3. A farmer wants to buy a new combine rather than hire
a custom harvester. The total fixed costs for the
desired combine are $21,270 per year. The variable
cost (not counting the operator’s labor) are $8.75 per
hour. The farmer can harvest 5 acres per hour. The
custom harvester charges $16.00 per acre. How
many acres must be harvested per year to
break-even?