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Break-even Analysis
IPE 3205

Presented By
Mahjabin Moon
Assistant Professor
Department of Mechanical and Production Engineering
Ahsanullah University of Science and Technology
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Break-even analysis
➢ A break-even analysis is a financial tool which helps to determine at what stage a
company, or a new service or a product, will be profitable.

➢ In other words, it’s a financial calculation for determining the number of products
or services a company should sell to cover its costs.

➢ It is of vital importance in determining the practical application of cost functions.

It is a function of three factors, i.e. sales volume, cost and profit.

➢ It aims at classifying the dynamic relationship existing between total cost and
sales volume of a company
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Break-even point
➢ Break-even point represents that volume of production where total costs equal
to total sales revenue, resulting into a no-profit or no-loss situation.
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Break-even point
➢ If output of any product falls below the break-even point there is loss; and if
output exceeds that point there is profit.

➢ Thus, it is the minimum point of production where total costs are recovered.
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Break-even point
➢ The break-even point (B.E.P.) of a firm can be found out in two ways. It may be
determined in terms of
- physical units (volume of output) or
- money value (value of sales)
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Break-even analysis
➢ Fixed cost
A fixed cost is a cost that does not change with an increase or decrease in the
amount of goods or services produced or sold.

Example: Rent, insurance, interest expense, property taxes etc.

➢ Variable cost
A variable cost is an expense that increases or decreases in direct proportion to
production volume.

Example: Direct labor, raw materials, packaging etc.

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Break-even analysis
Recurring costs
➢ Costs that are repetitive and occur when a firm produces similar goods and
services on a continuing basis.

➢ Variable costs are recurring costs because they repeat with each unit of output.

➢ A fixed cost that is paid on a repeatable basis is also a recurring cost:

– Office space rental
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Break-even analysis
Nonrecurring costs

➢ Costs that are not repetitive, even though the total expenditure may be
cumulative over a relatively short period of time.

➢ Typically involve developing or establishing a capability or capacity to operate.

➢ Examples are purchase cost for real estate upon which a plant will be built, and
the construction costs of the plant itself.
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Break-even analysis
➢ Unit Price
The amount of money charged to the customer for each unit of a product or service.
➢ Total Cost
The sum of the fixed cost and total variable cost for any given level of production.
Total cost = (Fixed Cost + Total Variable Cost )
➢ Revenue
Revenue is the total amount of income generated by the sale of goods or services
related to the company's primary operations.
➢ Profit/ loss
The monetary gain or loss resulting from revenues after subtracting all associated
costs.
Profit/loss = (Total Revenue - Total Costs)
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Break-even chart
Revenue

Total cost
BEP
Costs & revenues ($)

Variable cost

Fixed cost

Quantity (units)
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Break-even analysis
➢ A simple relation for the breakeven point may be derived when revenue and total
cost are linear functions of quantity, Q.

TR = TC
sQ = FC + vQ
Where,
TR = Total revenue = s × Q
s = Price per unit
Q = Quantity
TC = Total cost = FC + VC
FC = Fixed cost
VC = Variable cost = v × 𝑄
v = Variable cost per unit
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Break-even analysis

Profit, P = Total revenue − Total cost

= TR − (FC + VC)
= sQ − FC − vQ
= (s – v)Q − FC

P + FC
Q=
s −v

FC
Q BEP =
s −v
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Break-even chart
FC
BEPX = Q BEP = Revenue
s −v
Total cost
BEP
Costs & revenues ($)

Variable cost

Fixed cost

Quantity (units)
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BEP$ = BEPx × s

FC
= ×s
s −v

FC
= s −v
s

FC
= v
1−s
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Example
A firm produces radios with a fixed cost of $7000 per month and a variable cost of
$5 per radio. If radios sell for $8 each then

a) Calculate the break-even point.

b) What quantity is needed to produce a profit of $2000 per month?

Answer b)
a)
FC P + FC
Q BEP = Q=
s −v s −v

7000 2000 + 7000

= =
8−5 8−5
= 2333.333 ≅ 2334 𝑟𝑎𝑑𝑖𝑜𝑠/𝑚𝑜𝑛𝑡ℎ = 3000 𝑟𝑎𝑑𝑖𝑜𝑠/𝑚𝑜𝑛𝑡ℎ
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Example
Normal production level of a renowned company is 60 units per month, but due to
significantly improved economic conditions, production is now 72 units per month.
Fixed cost is $2400 per month. Variable cost per unit is $35 and selling price per
unit is $75.

a) Calculate the current break-even point.

b) How does the increased production level of 72 units per month compare with
the current break-even point?
c) What is the current profit level per month for the facility?
d) What will be the selling price if monthly production level reduced to 45 units and
others remain constant?
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Example
Here,
Fixed costs, FC = $2400 per month
Variable cost per unit, v = $35
Selling price per unit, s = $75

(a). We know,
FC
Q BEP =
s −v

2400
=
75 −35

= 60 units
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Example
(b) The breakeven value is 60 units. The increased production level of 72 units is
above the breakeven value.

(c) Profit, P = (s – v)Q − FC

= (75 - 35) × 72 – 2400
= $ 480

(d) Profit, P = (s – v)Q − FC

For Q = 45 units,
480 = (s - 35) × 45 – 2400
s = $ 99
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Break-even analysis
Multiproduct Case

FC
𝐵𝐸𝑃$ =
v
∑ [ 1 − i × Wi ]
si
Where
v = variable cost per unit
s = price per unit
FC = fixed costs
W = percent each product is of total dollar sales
i = each product
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Example
The owner of a small restaurant wants to calculate the break-even sales. Their
fixed cost is $3,500 per month. The details information are summarized in following
table.
Annual Forecasted
Item Price ($) Cost ($) Sales Units
Sandwich 2.95 1.25 7,000
Soft drink 0.80 0.30 7,000
Fries 1.55 0.47 5,000
Tea 0.75 0.25 5,000
Salad 2.85 1.00 3,000

a) Calculate the annual break-even sales.

b) Calculate the number of units of each product that will need to be sold per day in
order to achieve that annual break-even sales.
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Example
Fixed costs = $3,500 per month

Annual
Selling Variable Annual % of Weighted
1- Forecaste
Item (i) price (s) cost (v) (v/s) Forecasted Sales Contribution
(v/s) d Sales
($) ($) Sales unit (W) (col 5 x col 8)
($)
Sandwich 2.95 1.25 0.4 0.58 7000 20,650 0.446 0.259
Soft drink 0.8 0.3 0.4 0.62 7000 5,600 0.121 0.075
Fries 1.55 0.47 0.3 0.7 5000 7,750 0.167 0.117
Tea 0.75 0.25 0.3 0.67 5000 3,750 0.081 0.054
Salad 2.85 1 0.4 0.65 3000 8,550 0.185 0.12
46,300 1 0.625
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Example
FC
(a) BEP$ =
∑[ v
1 − s i × Wi ]
i

3500 ×12
BEP$ = 0.625

= $ 67200
(b) Annual sales = $ 67200
67200
Daily sales =
312
= $ 215.38
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Example
0.446 ×215.38
Sandwich sales per day = = 32.56 ≈ 33 units
2.95

0.121 ×215.38
Soft drink sales per day = = 32.58 ≈ 33 units
0.80

0.167 ×215.38
Fry sales per day = = 23.21 ≈ 24 units
1.55

0.081 ×215.38
Tea sales per day = = 23.26 ≈ 24 units
0.75

0.185 ×215.38
Salad sales per day = = 13.98 ≈ 14 units
2.85
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Thank You