NAME: KOKORIA.

BATOROMAIO DATE:28 September 2023

ID: S11125765
TITLE: BREAK EVEN ANALYSIS
PAPER TYPE: LAB REPORT

OBJECTIVES:
To compare alternative strategies using a break-even Excel chart with Calculation
and evaluate their impact on the financial performance of the business or project.
INTRODUCTION:
The break-even point represents the level of activity where a company's total
revenue matches the combination of all variable and fixed costs. This level of
activity can be measured in terms of units or dollar sales. At the break-even point,
there is no profit or loss. It is the point where the total cost and selling price are
equal, resulting in no gain or loss for the firm. The income of the business exactly
matches its expenditure. This specific point is also called the breakeven point,
which is the level of activity at which total revenue equals the sum of variable and
fixed costs [1].
The analysis involves considering two types of costs: fixed costs and variable
costs.
Fixed costs are the expenses that do not change with the volume of production and
include things like buildings, insurance, depreciation, overheads, and information
systems [2]. These costs are incurred regardless of the level of operations. An
example of a fixed cost could be the cost of purchasing excavation equipment,
regardless of the specific excavation work being done.
Variable costs are the costs that change with the volume of production or
construction. They include items such as direct labor costs, fuel costs, material
costs, and marketing expenses [2]. The total cost of production or construction is
the sum of the fixed costs and the total variable costs. Revenue, on the other hand,
is obtained by multiplying the expected unit sales with the unit price.
Break-Even Analysis Formula:
𝐐𝐁𝐄 = 𝐅/(𝐒𝐏 − 𝐕𝐂) (1)

𝐐𝐁𝐄 − 𝑩𝒓𝒆𝒂𝒌 𝒆𝒗𝒆𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚

𝑭 – 𝑭𝒊𝒙𝒆𝒅 𝒄𝒐𝒔𝒕𝒔,
𝑺𝑷 – 𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝒑𝒓𝒊𝒄𝒆/𝒖𝒏𝒊𝒕
𝑽𝑪 – 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕
Break-even analysis also includes calculating (Q = number of
units sold).
Total cost = sum of fixed and variable cost.
𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕 = 𝑭 + 𝑽𝑪 𝒐𝒓
= 𝑭 + (𝑽𝑪 × 𝑸 (If VC is given cost per unit) (2)
Revenue = amount of money gained from sales:
𝑹𝒆𝒗𝒆𝒏𝒖𝒆 = 𝑺𝑷 × 𝑸 (3)
Methodology:

Step 1: Collect data

•list all relevant financial data such as SP (per unit),FC, VC.

Step 2: Create a spreadsheet in Excel

• open excel new spreadsheet
• Label columns for Quantity, Variable Costs per Unit, Total Revenue

Step 3: Calculate Total Costs

•In the quantity column, list various quantities of units sold or produced (e.g,
50,100,150...).
•In the “Total Costs” column, use Excel formulas to calculate the total cost for each
quantity as in formula; Total Cost = Fixed Cost + (Variable Costs per Unit*Quantity)

Step 4: Calculate Total Revenue

•in total Revenue columns
•click insert tab and select a line chart or a scatter plot chart.

Step 5: Calculate the Break-Even Point;

•To find the break-even point, look for the quantity at which Total Costs equal Total
Revenue.
•You can do this manually by comparing the values in the “Total Costs” and “Total
Revenue” columns or by using Excel’ formula tools.
Analysis:

Q1)
Table of Results 1: tabulate selling price with capacity units.

Input Sale Dollar Value Capacity Units (Q)

Selling Price (SP1) $20.00 12,000 (Q1)
Selling Price (SP2) $18.00 15,000 (Q2)

Calculation Formula:

𝐵𝐸𝑃(𝑢𝑛𝑖𝑡𝑠) = 𝐹𝐶/ (𝑆𝑃 − 𝑉𝐶) (1)

𝑄𝐵𝐸 = 𝐹𝐶/(𝑆𝑃 − 𝑉𝐶) (2)

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝐹 + 𝑉𝐶 × 𝑄 (3)

𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑆𝑃 × 𝑄 (4)

Whereas:

𝑄𝐵𝐸 − 𝑏𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦

𝐹𝐶 − 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
𝑉𝐶 − 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡
𝑆𝑃 − 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒/𝑈𝑛𝑖𝑡
𝑄 − 𝑞𝑢𝑎𝑛𝑡𝑖𝑦 𝑈𝑛𝑖𝑡
Given:

FC = $70,000

VC = $8.00

Q1 = 12,000 & Q2 = 15,000

Thus, the evaluation of Total Cost and Total Revenue for each Selling Price:

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 (𝑄1) = 𝐹𝐶 + 𝑉𝐶 × 𝑄1 = $70,000 + $8.00 × 12,000 = $166,000.00

Total Revenue (Q1) = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑆𝑃1 × 𝑄1 = $20 × 12,000 = $240,000

Profit (Q1) = Total Revenue – Total Cost = $74,000.00

Total Cost (Q2) = 𝐹𝐶 + 𝑉𝐶 × 𝑄1 = $70,000 + $8.00 × 15,000 = $190,000.00

𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 (𝑄2) = 𝑆𝑃2 × 𝑄 = $18 × 15,000 = $270,000.00

Profit (Q2) = T/R – T/C = $80,000.00

From the calculated value we can justify that selling price of $18 with quantity of 15,000 has higher profit of $80,000 compared to $20 with
12,000 units has less profit of $74,000.

Tables 2: tabulate data for each selling price;

Unit Selling Fixed Cost Variable Cost Total Cost Total Revenue Profit
Price (VC)
12,000 $20 $70,000 $8.00 $166,000.00 $240,000.00 $74,000.00
15,000 $18 $70,000 $8.00 $190,000.00 $270,000.00 $80,000.00
 Break Even Chart
$300,000.00

$250,000.00
BEP

TOTAL REVENUE
$200,000.00

$150,000.00 5850, 117000

$100,000.00

$50,000.00

$0.00
0 2000 4000 6000 8000 10000 12000 14000
PRODUCT QUANTITY

Figure 2: represent Total revenue/total cost vs Quantity of the Product (unit)

This chart locate the Break-even point which the business much identified in order to see the risk of loss or profit with the amount of its Selling
price.
 Break Even Point
$350,000.00

$300,000.00

$250,000.00

TOTAL COST/REVENUE
$200,000.00
Total Cost
$150,000.00
Total Revenue
$100,000.00
Total Profit
$50,000.00 fixed cost
-$400.00
$0.00

300
1300
2200
3100
4000
4900
5800
6700
7600
8500
9400
10300
11200
12100
13000
13900
14800
-$50,000.00

-$100,000.00
UNITS

Figure 3: display the total cost/ total revenue of the selling units

As it seen in this chart, the plot indicates the data of the given values which have significance in the calculation and determining of break-even
point. Where at plotted point the fixed cost, total profit, total cost and total revenue values are located and identified according to significant
factors in given formulas.
Q2)

Table 3: Processes costs and Units:

Fixed Cost Variable Cost Quantity (Q)

Process A $20,000 $30 50x
Process B $30,000 $15 50x
Outside Supplier $0 $50 50x

Calculation for total cost for Processor A and Processor B:

Total cost = FC + VC x Q

𝑇𝐶(𝐴) = 20,000 + 30 × 50 = $21,500.00

𝑇𝐶(𝐵) = 30,000 + 15 × 50 = $30,750.00
𝑇𝐶(𝑂𝑆) = 0 + 50 × 50 = $2,500.00
TABLE 3: Tabulate units and total costs for Process A and B compare with total cost in Outside supplier.

Units Total Cost (A) Total Cost (B) Total Cost (OS)
50 $ 21,500.00 $ 30,750.00 $ 2,500.00
100 $ 23,000.00 $ 31,500.00 $ 5,000.00
150 $ 24,500.00 $ 32,250.00 $ 7,500.00
200 $ 26,000.00 $ 33,000.00 $ 10,000.00
250 $ 27,500.00 $ 33,750.00 $ 12,500.00
300 $ 29,000.00 $ 34,500.00 $ 15,000.00
350 $ 30,500.00 $ 35,250.00 $ 17,500.00
1000 $50,000 $ 42,750.00 $ 50,000.00

𝑇(𝐴) = $20,000 + $30 𝑥 1000 = $50,0000, 𝑤ℎ𝑒𝑟𝑒 𝑇𝐶(𝑂𝑆) = $50 𝑥 1000 = $50,000 (no profit and no expense)

𝑇(𝐵) = $30,000 + $15 𝑥 850 = $42,7500, 𝑊𝑖𝑡ℎ 𝑇𝐶(𝑂𝑆) = $50 𝑥 850 = $42,750.00 ($250.00 profit)
Refer to the table in the Excel sheet Q2, the level of demand for alternative A is 1000 units. In the table of calculations for Alternative B, we can in
Excel attached file as well that the required demand in order to have profit is 850 units.

See the chart which plots the break-even point for each alternative in-house process vs. outside supplier.

Break Even Point A

$350,000.00
$300,000.00
$250,000.00
BEP
$200,000.00
$150,000.00
Dollar $100,000.00 1000, 50000
$50,000.00
$-
$(50,000.00) 0 1000 2000 3000 4000 5000 6000
$(100,000.00)
$(150,000.00)
Units

Total Cost(A) Total Cost (OS) Total Profit

Fixed Cost A BEP Yintercept

Figure 4: the value of Dollar Revenue/Cost/Profit vs Units

Referring to the chart in fig.4, we can see values for total cost total revenue and total profit, fixed cost for alternative A. we can locate the Break-
even point as shown in the chart thus we value for required data.
 Break Even Point Process B
$350,000.00
$300,000.00
$250,000.00 BEP
$200,000.00
$150,000.00

Dollar
$100,000.00 850, 42500
$50,000.00
$-
$(50,000.00) 0 1000 2000 3000 4000 5000 6000
$(100,000.00)
$(150,000.00)
$(200,000.00)
Units

Total Cost(B) Total Cost (OS) Total Profit BEP Yintercept

Figure 5: represent the amount of dollar vs demand units

In the chart plotted in Fig. 5, it is clear that we plot and locate the values for total cost (B), total cost (OS), total profit, and Break Even Point and
the Dollar gained at BEP. These values are identified and justified for improving the decision-making for the business considerations.
Conclusion:
in addressing the first question, Fine Manufacturing’s pricing strategy decision is critical. By using a break-even
analysis, it’s clear that setting the product price at $18 per unit, instead of the original $20 per unit, reduces the
number of units required to cover costs. With the $18 price, they expect to sell 15,000 units, resulting in a total
profit contribution of $150,000. Conversely, the $20 price strategy forecasts sales of 12,000 units and a total
contribution of $144,000. This highlights the importance of considering both price per unit and sales volume.
Opting for the $18 price not only accelerates the break-even point but also boosts profitability.
In evaluating the second question, choosing between Process A and Process B for Zodiac Furniture’s metal office
chairs depends on understanding the break-even point. Process A, with lower fixed costs but higher variable costs
reach break-even point quickly with high demand. In contrast, Process B, with higher fixed costs and lower
variable costs, is cost-effective for lower production quantities or when the break-even point is at higher demand
levels. The decision should align with accurate demand forecasts, cost dynamics, and the company’s financial
objectives and market conditions.

References:

[1] T. Tamplin, “Break-even point: Formula, methods to calculate, importance,” Finance Strategists,
https://www.financestrategists.com/accounting/cost-accounting/cost-volume-profit/break-even-point-analysis/
(accessed Sep. 28, 2023).

[2] “(PDF) break-even analysis - researchgate,” Break even analysis,

https://www.researchgate.net/publication/280238278_Break-even_analysis (accessed Sep. 28, 2023).