BREAK-EVEN ANALYSIS 2ND Semester, 2020-21

What Is a Break-Even Analysis?

Break-even analysis entails calculating and examining the margin of safety for
an entity based on the revenues collected and associated costs. In other words,
the analysis shows how many sales it takes to pay for the cost of doing
business.
A break-even analysis results in neither a profit nor a loss. Instead, it determines
the number of sales needed to cover all variable and fixed costs. It calculates
the minimum number of units to sell and the sales volume needed to pay all
expenses before making a profit.
To illustrate the principles of this analysis clearly, it more conveniently is
presented on a chart called the break-even chart which shows the fixed cost,
variable cost, the expected profit, or loss at any production levels.
The intersection of the income and the variable costs indicates the break-even
point or the point where there is no loss nor profit.

CEAT – IE Department 1
BREAK-EVEN ANALYSIS 2ND Semester, 2020-21

In the discussion of Break-even point, there are 3 terms that is commonly used.
They are the profit, the revenue and the cost.
The formula for for Profit is…. Profit = Revenue – Cost
In this formula, if the result of the computation is positive or Profit will be
positive, that means that company is gaining a profit. If the answer bears a
negative Profit, then at that point, the company is still losing or the company is
not able to earn yet. However, if the answer is zero, then the company is at
break-even point.
To illustrate: If Profit = +, the company is gaining profit
If Profit = -, the company is losing
If Profit = 0, the company is at break-even point
This time, the revenue is equal to cost.
With regard to cost, there are two (2) kinds of cost that is involved:
Cost = Variable cost + Fixed Cost
Variable cost are the cost of producing the product that varies proportional to the
quantity of production
Fixed cost are cost that must be paid regardless of the quantity produced.
Remember: Profit = Revenue – cost

CEAT – IE Department 2
BREAK-EVEN ANALYSIS 2ND Semester, 2020-21

Let us have an example:

A photocopying business determined that for every page of paper, an equivalent
of 10 cents of ink is used. In addition they also found out that for every
page of paper, the machine will incur and electrical cost of 5 cents. If the
cost of one paper is 40 cents, and they need to pay monthly rent and permit
of Php7,500.00 and a salary of Php 5,000.00, how many pages must they
print in order to break-even if they charge Php1.00 per page?
1. First assign a variable.
Let p = number of pages

Costs:
Fixed Cost = 7,500 + 5,000 = 12,500/month
Variable costs = 0.10 + 0.05 + 0.40 = 0.55/page
Cost = 12,500 + 0.55p

Revenue:
Price = 1.0/page

At break even … Profit = 0

Profit = Revenue – Cost
So..
0 = 1p – (12,500 + 0.55p)
0 = 0.45p – 12,500
p = 12,500 / 0.45 = 27,777.78 or 27,778 pages/month

CEAT – IE Department 3
BREAK-EVEN ANALYSIS 2ND Semester, 2020-21

The XYZ corporation manufactures book cases that it sells for P65.00
each. It costs P35,000.00 per year to operate its plant. This sum
includes rent, depreciation charges on equipment and salary payment.
If the cost to produce one bookcase is P50.00, how many cases must
be sold each year for the XYZ to avoid taking a loss?

Solution:

65X = 50X + 35,000

X = 2334 cases

CEAT – IE Department 4