CE 725

Construction Economics and

Finance

Break Even Analysis

Price vs. Cost
• What is the difference?
Break-Even Point
• Two types of costs
• Fixed Costs: Capital Costs like construction cost,
acquisition or installation costs

• Variable Costs: that vary directly with the production

output. Also called direct costs

• What happens when you increase the production of the

goods?
Break-even chart
Example #0
• An airline is evaluating routes to smaller cities.
Maximum capacity of route is 1000 passengers per
month. Ticket price is $120. Fixed costs are $63000
per month. Out of the ticket price 25% of the ticket
fare goes towards the costs like serving the
passenger etc.
• How many customers does the airline have to
transport to make a profit?
Example 1
• A drill costs Rs. 50000. It can drill 5 holes in an hour.
The life of drill is 10 years with no salvage value. Cost of
labour is Rs. 80 per hour. Cost of fuel etc. is Rs. 20 per
hour. You can earn about Rs. 25 per hole drilled. How
many holes per year should be dug to break even?
Interest rate = 10%

• 50000(A/P, 10,10) = Rs. 8130

• Per hole costs are = (80+20) / 5 per hole = Rs. 20
• Per hole revenues = Rs. 25
• If Y holes are drilled per year
• Break even: 25 = 20 + 8130/Y => Y = 1627 holes/year.
Break-even analysis for comparing
two alternatives
• A Contractor is thinking of selling his present dump
truck and buying a new one. New truck costs
$30000. Annual O&M for the new truck is $0.10
per ton-mile. It has a life of 15 years with no
salvage value.

• The present truck can be sold now at $10000. If

kept it will cost $0.15 per ton-mile in O&M and
have a expected life of 5 years from now. If i = 10%
find the break-even point
Solution
• Fixed costs
• A(new truck) = $30,000 (A/P,10%,15) = $3944 per year
• A(old truck) = $10,000(A/P,10%,5) = $2638 per year

• Variable costs:
• V(new truck) = 0.10 * X
• V(old truck) = 0.15* X

• Total annualized costs for the trucks

• TA(new truck) = 3944 + 0.1X
• TA(old truck) = 2638 + 0.15X
• Solve for X -> Break even point
Plot the both functions
Non-linear break even analysis
• Variable costs = Rs. 1000 per unit
• Fixed costs = Rs. 100,000 per time period
• Price = 21,000 / 𝑛

• Find break even point.

• What level of production (n) would you
recommend for the organization? Why?
Marginal cost of producing goods
• Rate of change of total cost with output
• How do I calculate marginal cost if my cost function
and revenue function are given?
Limitations
• How do you allocate costs to variable or fixed
costs?
• Relationships are not always linear. Getting the
relationship is a big problem
• The cost assumption stay good only for a few years.