Break Even Analysis: Linear Functions

Break even analysis has three components:

1. The cost of production
2. The volume of production and
3. The profit
Cost refers to the cost incurred by the firm during the production of a particular
product, involving the fixed costs, FC, and the variable costs, VC.
Fixed Costs are cost incurred that are independent on the volume q of units
produced
Variable Costs are the cost per unit of the product.
The total costs TC is expressed as
TC= VC + FC
Volume q refers to the level of production which can be expressed as quantity
of units produced and sold as volume of sales in pesos or as percentage of total
capacity available.
Profit P is the difference between the total revenue TR and total cost TC. It can
be expressed as
P= TR TC
Breakeven point is the volume or level of production wherein total revenue
from the sales of production is just sufficient to cover the cost of production. At
break-even point the profit is zero and the total revenue is equal to the total
cost.
At BEP, P=0
TR=TC











A company sells its products at P12 per unit. The products has a variable cost of
6 pesos per unit and the fixed cost is P42000. Determine the following.
1. TR, TC and P functions.









2. Sales volume when the profit is P18,000





3. Profit when sales are 12,000 units




4. Break even quantity and revenue




5. The amount at which the unit variable cost is to be increased or
decreased for the company to break even at 4000 units assuming that the
selling price and the fixed cost remain constant.



6. The new selling price per unit to break even at 600 units assuming that
the FC and UVC are constant.



7. The number of units to be sold to cover the fixed costs.







A company which produces novelty items incurs the following monthly costs in
producing a particular novelty item.
Fixed Costs are P10,000 Variable Costs are P8 per unit.
If the company produces 400 units and sold them at P23 per unit (assuming that
all units will be sold.)How much are the following:
1. Total cost
2. Total revenue
3. Total profit
4. At what volume will it break even
5. What is the profit if the volume of production is 700 units?
6. Suppose that the selling price was changed to P 30 per unit, what would
be its new break even volume? Break even revenue?
Hazel Grae Garments produces hand towels at the cost of P15 per unit and sells
them at 23 each. The weekly cost of production is P 5000. Determine the ff:
1. TR, TC and Profit functions
2. The break even quantity and revenue
3. If the selling price per hand towel is increased to P35, find the new break
even point if FC and VC remain constant.
4. If the company is able to reduce the price to P20 per unit of hand towel
but at the same time an increased in the overhead of P200 in operational
overhead is incurred, is it to her advantage? Assume VC is constant.
Exercises
A Company produces and sells a particular product. Unit selling price is P80 and
unit variable cost is P 60. The fixed cost is P120,000. Find the following.
a. TR, TC and Profit functions
b. Profit when sales is 20,000 units.
c. The break even quantity and revenue.
d. The volume sales to cover the fixed costs.
e. The volume sales it the Profit is P18,000
f. The amount by which the selling price will have to be decreased or
increased to break even at 4000 units
g. The amount by which the fixed cost has to be increased or decreased to
allow the company to break even at 1000 units. Assume UVC and USP are
constant.






Non Linear Functions
Example:
A merchant buys a particular product at P8 per unit and sells them for P13
unit. His fixed cost is P40. Due to stiff competition, the sale of the product began
to decline. The unit selling price is decreased by 10% of the number of units
sold. The variable cost and the fixed cost remain the same.
a. Represent the new selling price.


b. Determine TR, TC and Profit functions.


c. Find the BEP quantity and revenue.








What is the profit at the sales volume of 55 units.







Review of Basic Derivative Rules

1. The derivative of a constant is zero.
0
12
=
=
dx
dy
y


2. The derivative of a variable with respect to itself is 1.
Ex.
x y =

3. The derivative of a variable raised to a power n
1
) (

=
n
n
n
nx
dx
x d
x y

Ex.
3
x y =
4. The derivative of a function times a constant is equal to the constant
times the derivative of the function
1
= =
n n
nkx
dx
dy
kx y
Example:
4
3x y =
3
2x y =



5. The derivative of the sum or difference of two functions is the sum or
difference of their derivatives.
If ( ) ( ) ( )... x w x v x u y + + =
( ) ( ) ( )
...
dx
x dw
dx
x dv
dx
x du
dx
dy
+ + =

Example:
5 8 3
2 3
+ + = x x x y
6. The derivative of the product of two functions is equal to the first times
the derivative the second plus the second times the derivative of the first.
If ( ) ( ) x v x u y =
( ) ( ) | |
vdu udv
dx
x v x u d
dx
dy
+

=

Example: ( ) 2 2
3
= x x y

7. The derivative of the quotient of two functions is equal to the
denominator times the derivative of the numerator minus the numerator
times the derivative of the denominator divided by the square of the
denominator.
If
2
v
udv vdu
dx
v
u
d
v
u
y

=
|
.
|

\
|
=

Example:
2 3
2

=
x
x
y


8. The derivative of the function raised to nth power is equal to n times the
function raised to n-1 times the derivative of the function
( ) | |
n
x u y =
( ) | | dx x u n
dx
dy
n
=
1



Example:
( )
3
3
4 2 + = x x y
Application of Maxima and Minima

A factory sells a particular product at a price of P20 per unit. If TC is the total
cost of weeks production and TC=q
2
-30q-235, determine the following:
a. Profit function
b. Number of units to be produced to maximize profit
c. Maximum profit
The unit selling price of a particular product is P200. Due to the stiff competition
it has been decided to reduce the price by 1% of the number of units sold. IF the
fixed cost is P 10,000, determine the
a. TR, TC and Profit function
b. The break even quantity
c. The profit at a sale of 1000 units
d. The maximum profit
e. The number of units to sell to cover the fixed cost