Break-Even Point Analysis

By

Sheryl B. Satorre-----

TM 714 – Financial Management

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Outline:

• Definition• Basic Concepts• What it can be used for?• BEP Formula• BEP Chart• BEP Sample Problems• Limitations• Conclusion• References

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Break-Even Point Analysis

A decision-making aid that enables a manager to determine whether a particular volume of sales will result in losses or profits

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Basic Concepts

• Variable costs are costs that change with changes in production levels or sales. Examples include: Costs of materials used in the production of the goods• Fixed costs remain roughly the same regardless

of sales/output levels. Examples include: Rent, Insurance and Wages• Revenue is the total income received.

• Profit is the money you have after subtracting fixed and variable cost from revenue. 4

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What it can be used for?

•Monthly expenses- use it to see if your income is more then your expenses• Determine minimum price product can be

sold for• Determine optimum price product can be

sold for• Calculate effects of marketing programs on

price

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The Break-Even Point (BEP) Formula

P(X) = F + V(X)Where:• F = fixed costs• V = variable costs per unit• X = volume of output (in units)• P = price per unit

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Revenue Total Costs

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The Break-Even Point Formula (cont.)

If we rearrange the formula where the breakeven is X then the formula look like this

X = F /( P – V)

This formula says that the breakeven point is where the number of sales needed to make the cost equal to the revenue.

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Break-Event Point

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Break-Even Point Chart

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Sample Problem # 1Lets say you own a business selling

burgers

It costs Php 7.00 to make one burgerThat’s your V or Variable cost!

You sell each burger for Php 12.50.That’s your P or price per unit!

Your cost for rent, utilities, overhead, etc... is Php 100,000 per month.

That's your F or fixed cost! 9

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AnswerGiven: V = Php 7 P = Php 12.50 F = Php 100,000Solution:

X = F /( P – V)X = 100,000 / ( 12.50 - 7 )X = 100,000 / ( 5.5 )

X = 18, 181.818X ≈ 18, 182

To breakeven you would need to sell 18, 182 burgers.

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Sample Problem # 2

Try out this problem for your self

• You own a lemonade stand.• It costs you Php 1.50 to make cup of

lemonade• You sell your lemonade for Php 5.00.• It cost you Php 5,000 to rent for the

space of your lemonade stand.• How many cups of lemonade do you

have to sell to breakeven?Solve now

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AnswerGiven: V = Php 1.50 P = Php 5.00 F = Php 5,000Solution:

X = F /( P – V)X = 5000 / ( 5 – 1.50)X = 5000/ ( 3.5)

X = 1, 428.57X ≈ 1, 429

You would need to sell 1, 429 cups of lemonade to breakeven.

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Limitations of BEP Analysis

• Assumes that sales prices are constant at all levels of output.• Assumes production and sales are the same.• Break even charts may be time consuming to

prepare.• It can only apply to a single product or single mix

of products.

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Conclusion

• A Breakeven Analysis is a simple tool to use to determine if you have priced your product correctly.• A Breakeven Analysis helps you calculate how

much you need to sell before you begin to make a profit. You can also see how fixed costs, price, volume, and other factors affect your net profit.

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References:• Mejorada, Nenita D., Business Finance and Philippine

Business Firms. 2006.• A Framework for Management –Gary Dessler• Dessler, Gary, A Framework for Mabagement• Math Lover Hub Pages. Even Point Analysis. http://

mathslover.hubpages.com/hub/Breakeven-analysis• http://www.tutor2u.net/business/production/break_eve

n.htm 3/1/06

• http://connection.cwru.edu/mbac424/breakeven/BreakEven.html 3/1/06

• http://www.dinkytown.net/java/BreakEven.html 3/1/06• http://office.microsoft.com/en-us/templates/TC0111651

21033.aspx 3/1/06

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