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Chapter VI

BREAK-EVEN ANALYSIS

The main objective of break-even analysis is to find the cut-off production volume
from where a firm will make profit. To illustrate the principle of the analysis
clearly, consider the break-even chart in Fig 6.1. The break-even chart is the
graphical representation of break-even analysis which shows the fixed costs,
variable costs, the expected profit, or loss at any production levels.

Sales

Profit

Total Cost

Break-even Loss
Sales Fixed cost

Break-even production
Production Quantity (Q)

Fig. 6.1 Break-even chart

The corresponding volume of production on the X-axis is known as the break-

even sales quantity. At the intersection point, the total cost is equal to the total
revenue. This point is also called the no-loss or no-gain situation. For any
production quantity which is less than the break-even quantity, the total cost is
more than the total revenue. Hence, the firm will be making loss. For any
production quantity which is more than the break-even quantity, the total revenue
will be more than the total cost. Hence, the firm will be making profit.

Profit = Sales – (Fixed cost + Variable costs) (6-1)

Examples

6-01 ABC Electric Company which manufacture electric motors has a capacity of
producing 150 motors a month. The variable costs are P400,000.00 per month.
The average selling price of the motor is P75,000.00 per motor. Fixed costs of
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the company amount to P7,800,000.00 per month which includes all taxes.
Determine the number of motors to be produced per month to break-even.

Solution

Let x = number of motors to be produced each month to break-even

Expenses per month = P400,000+P7,800,000 = PP8,200,000.00

To break-even:

8,200,000 = 75,0000x

x = 109.33 = 110 units

6-02 A telephone switchboard 100 pair cable can be made up with either
enameled wire or tinned wire. There will be 400 soldered connections. The cost
of soldering a connection on the enameled will be P165.00, on the tinned wire, it
will be P115.00. A 100 pair cable made up with enameled wire cost P55.00 per
lineal foot and those made up of tinned wire cost P75.00 per lineal foot.
Determine the length of cable run in ft so that the cost of each installation would
be the same.

Solution

For the enameled wire:

Let x = length of cable

Cost of wire = 55x

Cost of soldering = 165(400)+55x

For the tinned wire:

Cost of wire = 75x

Cost of soldering = 115(400)

Total cost = 115(400) + 75x

In order to break-even:

165(400) + 55x = 115(400) + 75x

20x = 20,000

x = 20,000/20 = 1,000 ft
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6-03 Two electric motors are being considered to power an industrial hoist. Each
is capable of providing 100 hp. Pertinent data for each motor are as follows:

Motor A Motor B

Investment P500,000.00 P640,000.00

Electrical efficiency 84% 88%
Maintenance per year P8,000.00 P12,000.00
Life, years 10 10

Money is worth 20%. If the expected usage of the hoist is 700 hours per
year, what should be the cost of electrical power before Motor A is favored over
Motor B?

Solution

Let x = cost of electrical power for both motors to be equally economical

Motor A

Annual costs:

( )( )( )( )

Maintenance 8,000.00
Interest on capital=P500,000(0.20) 100,000.00
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Total annual cost P127,261.38+ 62,166.67x

Motor B

Annual costs:

( )( )( )( )

Maintenance 12,000.00
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Interest on capital =P640,000(0.20) 128,000.00

------------------------------------------
Total annual cost P164,654.56 + 59,340.91x

To break-even

P127,261.38+ 62,166.67x = P164,654.56 + 59,340.91x

x = P13.23 per kw-hr