V Break-even analysis is the use of a simple

mathematical formula to determine the

sales level at which the business neither
incurs a loss nor makes a profit.
V Break-even-point
Total Expenses = Net Sales / Revenue
V Breakeven Analysis in the context of
Production planning addresses the
decision of whether to make or buy a
product.
V Oaking the product involves two cost
elements:
¾ ixed costs such as machine renting
cost and operation expenses
¾ Variable costs such as raw material
cost
V Buying the product involves only one
cost element, the selling price. However,
the price may either be constant or
variable based on the quantity.
V Break-even-analysis gives a tool for a
manger to analyze the mix of products
that maximize profit for a period and
have cost control systems so that it can
minimize waste and improve productivity
of labor force and production
V The evaluation to determine necessary
levels of service or production to avoid
loss.
V Comparing different variables to
determine best case scenario.
V Costs of expansion, evaluation of sales or
profit performance, estimation of the
impact of various expenses on profit,
setting prices, and financial analysis in
general
V SP = nit Selling Price

V VC = nit Variable costs

V C = ixed Costs

V Q = Quantity of output units

sold (and manufactured)
V ë = ëperating ncome

V TR = Total Revenue

V TC = Total Cost

V SP = nit Selling Price

V 
  
  - f costs change appreciably
with fluctuations in business activity, they are
´variable.µ ëtherwise, they are ´fixed.µ A widely
used cost model is: Total Costs = ixed Costs +
Variable Costs
V
  is the amount of money, goods or services
that must be given up to acquire ownership or use
of a product.
V i  
  are repetitive and
occur when an organization produces goods or
services on a continuing basis, they are ´recurring.µ
ëtherwise they are ´nonrecurring.µ Variable costs
are recurring since they repeat with each unit of
output.
V ^  
  - f costs can be reasonably
measured and allocated to a specific output, they
are ´direct.µ ëtherwise they are ´indirect.µ
V ë 
  - All costs of providing goods or
services other than direct labor and direct material.
ndirect costs are a subset of overhead costs. ixed
overhead relates more to plant capacity than
production volume (variable overhead). Allocation
of overhead to specific outputs may be in
proportion to:
1. Direct labor hours
2. Direct material costs
3. Oachine hours
V ë

 
  - The cost of forgoing the
chance to earn interest (or profit) on investment
funds.
V That is the costing system has to
produce for each product what is the
unit variable cost, selling price of each
unit, fixed cost for a period. maximum
sales possible, which is estimated for a
future period. Then one can determine
the production point where the profit is
zero
V Profit = Revenue - Variable Cost - ixed Cost

V se the above model, but assume that Profit

= $0

so that Break-Even is where:

V Revenue = Variable Cost + ixed Cost

V (SP × Sales nits) = (VC × Sales nits) + C
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V Dhen total revenue is equal to total cost
the process is at the break-even point.

TC = TR
V Company XYZ has to choose between two
machines to purchase. The selling price is
$10 per unit.

V Oachine A: annual cost of $3000 with per

unit cost (VC) of $5.

V Oachine B: annual cost of $8000 with per

unit cost (VC) of $2.
V Determine break-even point for Oachine A
and Oachine B.

V Dhere: V = C
SP - VC
Oachine A:
v = $3,000
$10 - $5
= 600 units
Oachine B:
v = $8,000
$10 - $2
= 1000 units
V Compare the two results to determine
minimum quantity sold.

V Part 1 shows:
¾ 600 units are the minimum.
¾ Demand of 600 you would choose Oachine
A.
inding point of indifference between
Oachine A and Oachine B will give the
quantity demand required to select
Oachine B over Oachine A.

Oachine A = Oachine B
C + VC = C + VC
$3,000 + $5Q = $8,000 + $2Q
$3Q = $5,000
Q = 1667
V ünowing the point of indifference we will
choose:

V Oachine A when quantity demanded is

between 600 and 1667.

V Oachine B when quantity demanded

exceeds 1667.
^ 
21,000
18,000 $ %
15,000
12,000
9,000
$ 
6,000
3,000 Point of indifference
0
500 1000 1500 2000 2500 3000
Quantity
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V Requires estimated projections of
expected sales, fixed costs, variable
costs, and any costs that have both
fixed and variable characteristics

V seful only over a limited range of sales

volume extending not too far from the
expected level of sales
V To make investment or capital
decisions is to consider the
"discountedvalue of the cash flows" of
a proposed project. Such an analysis
focuses onthe time value of money to
better describe the "true" value of an
investment

V Cost-revenue relationship is linear-Oost

very small businesses do not
experience significant economies of
scale.
V Break-even analysis can be an effective tool in
determining the cost effectiveness of a product.
Break even analysis looks at the output required for
the firm to cover all costs
V Three methods of break even analysis ² equation,
chart, graph
V Break even allows you to look at the impact of a
change in the business environment
V Contribution ² total revenue ² variable costs
V irms can use contribution costing and pricing
methods to attempt to increase profitability
V Special order decisions ² look at how firms decide
whether to accept orders that are out of the
ordinary, need to consider contribution and
additional factors
V se as a comparison tool for making a decision.