TOOLS IN FINANCIAL AND

INVESTMENT DECISION

• Break-even cost/points/sales

• Return on Investment (ROI)

Prepared by: Shiella M. Allawigan

 Significance of Break even analysis as tool of financial
decision
 Break even analysis serves as the most useful and important managerial tool to study cost-
output profits relationships at varying levels of output .
 This will enable the top management to plan its operational strategies.
 A Finance manager can also make use of this analysis while estimating profits at various
levels of sales and production
 WHAT IS BREAK-EVEN ANALYSIS?
• It is a point where sales revenue equals the costs to make and sell the product and
no profit or loss is reported. Break-even is a situation where an organization is
neither making money nor losing money, but all the costs have been covered.

• Break-even analysis is useful in studying the relation between the variable cost,
fixed cost and revenue. Generally, a company with low fixed costs will have a low
break-even point of sale.
 Components of Break-Even Analysis
• Fixed costs
Fixed costs are also called overhead costs.
Fixed costs include (but are not limited to)
interest, taxes, salaries, rent, depreciation
costs, labor costs, energy costs etc. These
costs are fixed irrespective of the production.
In case of no production also the costs must be
incurred.
• Variable costs
Variable costs are costs that will increase or
decrease in direct relation to the production
volume. These costs include cost of raw
material, packaging cost, fuel and other costs
that are directly related to the production.
 BREAK EVEN PRICE
• Is the amount of money, or change in value , for which an asset must be sold to cover your costs of acquiring
and owning it. It can also refer to the amount of money for which a product or service must be sold to cover
the costs of manufacturing or providing it.
Break even sales price= (Total fixed costs/Production volume)+ Variable costs per unit
EXAMPLE:
The corporation makes a fashion slipper.
Costs of material:18.00
Direct labor : 23.00
Manufacturing supplies : 8.00
Cost per pair: 49.00
Total fixed cost:375,000.00

For 50,000 pair of sandals

Break even sales price= (375,000/50,000units)+49= 56.50
 METHODS OF DETERMINING THE
BREAK EVEN POINTS
A. GRAPHICAL METHOD
 Break-Even Point
• The sales volume level (in pesos or units) where total revenue equals
total costs that is, there is neither profit or loss.
Fixed Costs
Break-Even Points= Selling Price-Variable Costs

EXAMPLE:
MileHigh Inc. wants to calculate its break even point for a new widget.
Fixed Costs: 10,000.00
Variable cost(per unit of product): 1.00
Selling Price :5.00

Break-even point in unit = 10,000.00/5.00-1.00

=10,000.00/4
=2,500 units
 Break-Even Sales
• Refer s to the sales value which a company earns no profit no loss.
Fixed Costs*Sales
Break-Even Sales=
Sales-Variable Costs

EXAMPLE:
A company that engaged in the business of lather shoe manufacturing
Sales: 1,000,000
Variable Costs: 750,000
Fixed Cost: 400,000 Contribution Margin percentage =(1,000,000-7500,000)/ 1,000,000 x100
=25%

Break-even sales = 400,000*1,000,000/(1,000,000-750,000)

=1,600,000
 ROI (RETURN ON INVESTMENT)
What is ROI?
Return on investment, is a mathematical formula that investors can use to
evaluate their investment and judge how well a particular investment has
performed compared others.
 How do you calculate ROI?
There are multiple methods for calculating ROI. The common is EXAMPLE:
NET INCOME divided by the TOTAL COST OF
INVESTMENT , or ROI=NET RETURN ON • An investor purchases a lot, which is valued at
INVESTMENT/COST OF INVESTMENT X100. 500,000. Two years later, the investor sells
the property for 1,000,000.00
Another possible method to calculate ROI is INVESTMENT We use the investment gain formula in this case
GAIN divided by INVESTMENT BASE or INVESTMENT
GAIN /INVESTMENT BASE. There are numerous other ways
to calculate ROI. ROI= (1,000,000-500,000)
(500,000)
=1 or 100%
CHINKEE TAN

“IS AXIE INFINITY A GOOD INVESTMENT?”

“INVEST ONLY WHAT YOU
CAN AFFORD TO LOSE”