Break Even analysis

Chapter 37
Break Even
The Point where total cost is
exactly the same as total
revenue is called the break-
Even point

NO PROFIT- NO LOSS.
Break-Even output
The Level of output a
business needs to produce
so that total cost is exactly
the same as total revenue
Example
“Z” Manufactures 50 pens
Total cost = $2500
Selling price = $50 per pen
Find total revenue, break-even output and
suggest whether there is a profit or loss.
TR = P x Q
TR = $50 x 50 = $ 2500
TR = TC
$2500 = $2500
 Calculate Break Even
Using contribution = f.C / contribution

Using Cost and revenue TC = TR

Using graph
Calculating break even Using
contribution

Contribution = Selling price – Variable cost

Break even output = Fixed Cost

Contribution
Example
Jake who has setup a business making
iron park benches
Fixed cost $60,000
Variable cost $40-per bench
Selling price $ 100 per bench
Calculate break-even out put using cost
and revenue
TR = TC
 break even TR = TC
PXQ = fixed cost + variable cost
100 x Q = 60,000 + 40 x Q
100q – 40 q = 60,000
60q = 60,000 …… 60,000/60

Q = 1000
 Calculate break even using
revenue and cost

Total cost = Total fixed Cost + Total variable

Cost

Total revenue = Price x quantity

Break even : TC= TR

Fixed cost $ 60,000
Variable cost per bench $ 40XQ
Selling price is $ 100XQ each
TR = TC
Jack set up his business making iron benches
Fixed cost $ 60,000
Variable cost per bench $ 40
Selling price is $ 100 each .
Calculate break even out put
B.E : TC = TR
Fixed cost + variable cost = P x Q
$60,000 + 40 x Q = 100X Q
60,000 + 40Q = 100Q
60,000 = 60Q
Q = 1000
Using cost and revenue
Total cost = fixed cost + variable cost
= $60,000 + 40 X Q
Revenue = $100 x Q
TC = TR
60,000 + 40 Q = 100 Q
60,000 = 100Q – 40 Q
60,000 = 60 Q
Q= 1000
Check profitability
Example:
Jake who has setup a business making iron
park benches
Fixed cost $60,000
Variable cost $40-per bench
Selling price $ 100 per bench
Calculate contribution and the number of
benches Jake needs to sell to break-even.
If the bench manufacturer were to produce
1200 benches find Profit
Output produced below the break-
even level will make a loss.

Output produced above the break-

even level will make a profit.

Break even : TR = TC
Break even using chart
Limitations of Break-even
Analysis TR = TC
Limitations of Break-even Analysis:

Output and stocks

Unchanging conditions TR= TC

Accuracy of data

Multi product business

Main concepts ( = ,<,>)
The concept of break-even point is as
follows:
Profit when Revenue > Total Variable
cost + Total Fixed cost
Break-even point when Revenue =
Total Variable cost + Total Fixed cost
Loss when Revenue < Total Variable
cost + Total Fixed cost