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Break Even Analysis

The document discusses break-even point analysis for businesses. It defines break-even point as the point where total revenue and total costs intersect. It provides formulas for calculating total revenue, total costs, and profit. It also discusses using derivatives to find the maximum or minimum points of non-linear cost and revenue functions in order to determine production levels for maximum profit or minimum cost. Examples are provided to demonstrate how to apply these concepts.

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sardarca icai
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334 views2 pages

Break Even Analysis

The document discusses break-even point analysis for businesses. It defines break-even point as the point where total revenue and total costs intersect. It provides formulas for calculating total revenue, total costs, and profit. It also discusses using derivatives to find the maximum or minimum points of non-linear cost and revenue functions in order to determine production levels for maximum profit or minimum cost. Examples are provided to demonstrate how to apply these concepts.

Uploaded by

sardarca icai
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Break – Even Point Analysis

Break – Even Point is the point where the total revenue line and the total cost line intersect.

Symbols Used:
SP Selling Price BEQ Break – Even Quantity
TR Total Revenue BEP Break – Even Point
TC Total Cost BEP (BEQ, BER)
VC Variable Cost BER Break – Even Revenue
FC Fixed Cost

Formulas Used
TR = SP ×no . of units TC = FC + VC P = TR − TC

I. LINEAR FUNCTION: BREAK – EVEN POINT ANALYSIS

Example: ABC Co. sells its product at P16 per unit. The variable cost is P6 and the fixed cost is P2000. Find
each of the following:

a. TR, TC and Profit Function.


b. No. of Units to be sold if profit is P5000
c. Profit when sales are 800 units
d. The BEP
e. Number of units to sell to recover the fixed cost

II. NON – LINEAR FUNCTIONS: BREAK – EVEN ANALYSIS

Example: A certain company sells its product at P20. The selling price is decreased by 10% after learning
that the sale of product has begun to decline. Variable cost is P9 and the fixed cost is P1,000.

a. Represent the new selling price.


b. Determine the TR, TC and profit functions.
c. Find BEP
d. Determine the profit at a sale of 500 units.

III. MAXIMUM PROFIT AND MINIMUM COST

If the non-linear function is given, we can find its maximum or minimum point by using its derivates.

Rules of Derivates

1. The derivate of a constant is zero.

2. Power Rule for Positive Integers


If n is a positive integer, then
d
dx
( x n ) = nx n−1

3. Multiple Rule
d
If u is any differentiable function of x and c is any constant, then ( cu ) = c du
dx dx

4. The Sum Rule


If u and v are differentiable functions of x, then their sum u + v is a differentiable function of x and
d
( u + v ) = du + dv
dx dx dx

5. The Product Rule


d
The product of two differentiable functions u and v is differentiable and ( uv ) = u dv + v du
dx dx dx
6. Positive Integer Powers of a Differentiable Function
If u is a differentiable function of x, and n is a positive integer, then un is a differentiable and
d
( u ) = nu n −1 du
dx dx

7. The Quotient Rule


du dy
u v −u
At a point where v ≠ 0, the quotient y = of two functions is differentiable and d  u  dx dx
v   = 2
dx  v  v

IV. FINDING THE CRITICAL POINTS OF NON – LINEAR FUNCTIONS

Steps in Finding the Critical Points


1. Find the first derivative y’.

2. Set the first derivative to zero and solve for x.

3. Substitute this value of x in the original function and solve for y. These values of x and y are the coordinates
in the maxima or minima.

4. Test whether the point is maxima or minima by finding the second derivative y”. If y” is negative, the point
is maxima, if it is positive, the point is minima.
Example 1: Locate and classify the critical point of y = −3 x 2 +30 x −5
Example 2: Locate and classify the critical point of y = 2 x 3 − 6 x 2 −18 x + 20

V. APPLICATION OF MAXIMA AND MINIMA IN BUSINESS

Example 1: The profit function of a certain store is P = −4 x 2 + 32 x − 8 where P represents the profit, while x is
the number of units to sell. Find the maximum profit.

Example 2: A business firm estimated that its equation for cost is represented by the function
C = .16 x 2 − 20 x + 675 where C is the cost and x is the number of units to produce.

a. Find the number of units for minimum cost.

b. Find the minimum cost.

Example 3: A company sells its particular product at (16 – 0.02x) pesos. The variable cost is P8 and the fixed
cost is P600.

a. Find the production level to break – even.

b. Determine the production level that will yield maximum profit.

c. What is the maximum profit?

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