BREAK

EVEN
POINT
Analysis
Definition
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 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

(X) = F + V (X
Total costs
WHERE:
F = FIXED COSTS X=
VOLUME OF OUTPUT (IN
UNITS)
 TION
MARGIN
✖Determines the
sales amount left
over after
adjusting for the
variable costs of
ribution margin =
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

 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

EP ANALYSIS DIAGRA
 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.
Explanation of
the graph
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
 BREAKEV
EN 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
 BREAKEV
EN SALES
REVENUE
✖ the amount of money the business
generates from the sale of the
break-even quantity.
 #2
In
value(Sales
= revenue)
Fixed Cost________
Contribution Margin per Unit
x Sales

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%.

Break even (sales revenue) **(Sales minus the variable

expenses of 80% of sales
= Total Fixed Cost___ leaves a remainder of 20%
Contribution Margin of sales. In other words,
after deducting the variable
Ratio expenses there remains
= $100,000 only 20% of every sales
dollar to go towards the
20% fixed expenses and profits. )
= $500,000
 In #3
PERCENTAGE(PL
ANT 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%
 In #4
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
 NS
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
Selling price/unit $8,000
month; 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 Total fixed cost $200,000
(c) Break even point in
Capacity 1,000
sales value units
(d) Break even in
percentage
(e) At what price will they
break even?
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