Break-Even Analysis

Linear Profit Analysis

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 Basic Concepts
*Break-Even Analysis
the determination of the number of units
that must be produced and sold to equate total
sales with total cost.
*Break-Even Point
the volume of sales for which total sales
equals total costs where profit is equal to zero.
It also useful in determining volume sales
required to generate desired profit.
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 Components of Break-Even analysis
1. Volume – the level of production by a
company, which is expressed as the
number of units (quantity) produced and
sold.
2. Profit – the difference between total sales
and total cost or the income generated by
the sale of a product.
3. Cost – the usual number of different costs
that must be taken into account in order to
determine profit.
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• Fixed Cost – a cost that is independent of the
volume of units produced. It will remain the
same regardless of the volume of sales.
(examples: rental, management salaries, some
forms of depreciation, property taxes, etc.)
• Variable Cost – a cost that is determined on a
per-unit basis. It grows in direct proportion to
the volume of sales--It increase in the same
amount for each additional unit sold fall into this
category. (examples: material costs, direct labor
costs in manufacturing, utilities, etc.)
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 Notations used in Break-Even analysis
• x – volume of output or sales in units
• P – profit
• SP – selling price per unit
• VC – Variable costs
• FC – Fixed costs
• TC – Total costs ( for x units)
• TR – Total revenue (from the sale of x units)
• BEQ – Break-even quantity
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Source: Basic Quantitative Techniques by
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Example 1: The Glass Company, a manufacturing
company located in Rizal, produces paperweights
for export to Japan. The company sells these
paperweights to major retail chain for Php 125
each, which does not include shipping cost of
Php 20 per paperweight. These paperweights are
then marked up to a retail-selling price in Japan of
Php 560 per paperweight. The workers in the
factory are paid, on the average, the equivalent of
Php 420 per day, and it is estimated that the
average daily output per worker is 70 paperweights.
The cost of the material is estimated at Php 44 per
paperweight. Fixed costs for this operation are
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estimated to be Php 6 000 000 a year.
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a. What is the break-even point of
the company, in terms of the
number of paperweights per
year?
b. If the company sold 150000
paperweights last year, how
much profit (loss) did it have for
the year?
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 Solution:
Given:
Selling Price (SP) = Php 125
Labor Cost = (daily salary of worker) ÷ (average daily output of worker)
= 420 ÷ 70 = Php 6
Variable Cost (VC) = material cost + labor cost = 44 + 6 = Php 50
Fixed Cost (FC) = Php 6 000 000 per year
x = number of paperweights sold per day
Total Revenue (TR) = (SP)(x)
Total Costs (TC) = FC + (VC)(x)
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a. Determine the break-even point
Use TR = TC
Substitute (SP)(x) = FC + (VC)(x)
Solve for x
(SP)(x) – (VC)(x) = FC
x (SP – VC ) = FC
𝐹𝐶
x=
(𝑆𝑃 ;𝑉𝐶)
Substitute the values of FC, SP, VC
6000000
𝑥= = 80000 paperweights
125;50 Source: Basic Quantitative Techniques by
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If the company produced 80 000
paperweights in a year, it will meet the
break-even point, thus there will be no
profit or loss.
*substitute x = 80 000 to either TR or TC:
TR = (SP)(x) = (125)(80000)
= Php 10 000 000
TC = FC + (VC)(x) = 6 000 000 + (50)(80000)
= Php 10 000 000
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As shown in the figure, the point which the
total revenue (TR) and the total costs (TC)
line intersect is the break-even point,
which is where they are equal.

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 b. Determine the profit if the company
will produce 150 000 paperweights.
Solution:
Recall the profit formula :
Profit (P) = Total revenue (TR) – Total Cost (TC)

P = TR – TC
= (SP)(x) – [FC + (VC)(x)]
= (125)(150000) – [6000000 + 50 (150000)]
P = Php 5 250 000 profit
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Conclusion: The company will generate a
profit of Php 5 250 000 if they produce
and sell 150000 units of paperweights.

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• Example 2: Two brothers have a catering
business. They offer a selection of pasta in the
afternoon to college students. At present, they
prepare the pasta at their home, which is 10km
away from school. The average cost per pasta,
including the transportation, material, and direct
labor, is approximately Php 30. The school has
recently offered to lease them a small space on
campus. The rent for this space is Php 3500 per
month. The two brothers estimate that they will
be able to produce the pasta at this new location
at an average cost of Php 25 per serving of pasta.
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Question: How much servings of
pasta in a month do they have
to sell to be indifferent to the
costs of working at home versus
working in the space on
campus?

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Solution: The objective is to determine
the amount of servings of pasta to sell
in order to equate the costs if the two
brothers will work at home and on
school campus.
• Set up the equations for the two options:
Option 1: Working at home
Total Costs (TC1) = (VC1)(X)
Option 2: Working on campus
Total Costs (TC2) = FC2 + (VC2)(X)
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 The break-even point between
these two options is where the two
total costs lines intersect. The
break-even point is calculated as
follows:
TC1 = TC2

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Substituting for TC1 and TC2
(TC1) = (VC1)(X) (TC2) = FC2 + (VC2)(X)

(VC1)(X) = FC2 + (VC2)(X)

30x = 3 500 + 25x
30x – 25x = 3 500

x = 700 servings of pasta per month

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 To plot the graph, substitute the
volume X = 700 to either TC1 or TC2
functions.
Total Costs (TC1) = (VC1)(X)
= (30)(700)
=Php 21000

Total Costs (TC2) = FC2 + (VC2)(X)

= 3500 + (25)(700)
= 3500 + 17500
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= Php 21000 Sirug
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B. Their parents have decided that they
are going to charge them Php 1000 per
month because of the additional
out-of-pocket costs involved with
preparing the pasta at home (electricity,
cleaning supplies, etc.) What is the new
break-even point under these
circumstances between at home and
working on campus?
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 March 11, 2019 Linear Profit Analysis
• A small manufacturing operation can
be produce a certain product that
sells for Php 64 per unit. The variable
cost per unit is Php 36, and the fixed
cost per week is Php 5600.
(a) How many units must be sold per
week to break eve?
(b) Determine the firm’s weekly
profit or loss if it sells 340 units.
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 Nonlinear Profit Analysis
• In a nonlinear function it is a
capital mistake to assume that
the increase in production would
mean the increase in profit. It is
more realistic for the volume to
vary as price increased or
decreased due to external
factors. Source: Basic Quantitative Techniques by
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• Example: The RFS Electronic Company
produces portable DVD players. The
annual fixed cost of producing portable
DVD players is Php 150 000. The
variable cost of producing a portable
DVD player is Php 1000. The company
sells the portable DVD player for Php
2510. The selling price is decreased by
10% after learning that the sales of the
product have begun to decline.
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A.Represent a new selling price.
B.Find the TR and TC function.
C.Find the break-even point.

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 A. Represent a new selling price.
• Let X = number of portable DVD players
sold.

New Selling price = selling price – 10% of

the number of portable DVD players sold

New Selling Price = (2510 – 0.10X) per unit

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B. Find the TR and TC function.
TR = ( selling price – 0.10X)X
= (2510 – 0.10X)X
TR = 2510X – 0.10X2
TC = Fixed cost + Variable Cost (X)
TC = 150000 + 1000X
Profit = TR – TC
= 2510X – 0.10X2 –(150000 + 1000X)
Profit = -0.10x2 + 1510X - 150000
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 C. Find the break-even point.
• At break-even point, profit = loss = 0
Multiply – 10 to the equation to eliminate the decimal
point:
X2– 15100X + 1500000 = 0
Factor the given eq.:
( X – 100)(X – 15000) = 0
If X – 100 = 0 If X – 15000 = 0
X = 100 BEQ X = 15000 BEQ
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 C. Find the break-even point.
To determine the break-even revenue,
substitute the values of X

If X = 100 If X = 15000
TR = 2510X – 0.10X2 TR = 2510X – 0.10X2
TR = Php 250000 TR = Php 15150000

BEP=(100,250000) BEP=( 15000, 15150000)

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Source: Basic Quantitative Techniques by
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• October 8, 2019.
The RFS Electronic Company produces
portable DVD players. The annual fixed
cost of producing portable DVD players is
Php 150 000. The variable cost of
producing a portable DVD player is Php
1000. The company sells the portable
DVD player for Php 2510. The selling
price is decreased by 10% after learning
that the sales of the product have begun
to decline. Source: Basic Quantitative Techniques by
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At a sale of 250 portable DVD
players, determine:
a. Total revenue
b. Profit
c. Graph to show the break-even
point.

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 D. Determine the profit (or loss) at a
sale of 250 portable DVD players.
If X = 250 portable DVD players.

Profit = -0.10x2 + 1510X – 150000

Profit = -0.10(250)2 + 1510(250) – 150000
Profit = Php 221250
Selling 250 units of portable DVD
players will generate a profit of Php 221250
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 Forecasting
A Forecast is a prediction, estimate,
or determination of what will occur
in the future based on a certain set
of factors.

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Values being forecast may be:
1.Sales
2.Interest
3.Rates
4.Funds
5.Gross National Product (GNP)
6.Technological Status
Factors on which a forecast is based may any of the
following:
1.Past Data
2.Opinion or Judgment
3.Company Data; or
4.Perceived pattern related to time
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 Forecasting Method or
Time Series Methods
• Simple Moving Average
• Weighted Moving Average
• Simple Exponential Smoothing
• Adjusted Exponential Smoothing
• Forecast Reliability

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 Simple Moving Averages

The un-weighted average of a

consecutive number of data
points. It is a forecasting method
simply eliminates the effects of
seasonal, cyclical, and erratic
fluctuations by getting the
historical data.
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Formula:
∑(𝑚𝑜𝑠𝑡 𝑟𝑒𝑐𝑒𝑛𝑡 𝑛 𝑑𝑎𝑡𝑎 𝑣𝑎𝑙𝑢𝑒𝑠)
Simple Moving Average =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑡𝑖𝑚𝑒 𝑝𝑒𝑟𝑖𝑜𝑑𝑠

Example: The WSS motorcycle dealer in Quezon

Avenue area wants to accurately forecast the
demand for the WSS hybrid motorcycle during
the next month. Because the distributor is in
Germany, it is difficult to send motorcycle back
or recorded if the proper number of
motorcycles is not ordered a month ahead.
From sales records, the dealer has accumulated
the following data for the past 11 months.
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Compute the three and five-month moving average
forecast on demand.
Month
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov
Mot
orcy 60 70 50 90 10 80 150 70 110 150 130
cles

Computation for the Forecast on 3-month moving Average:

For the month of April – include the months prior to the
month of April (January, February, March)
60 + 70 + 50 180
𝐴𝑝𝑟𝑖𝑙 = = = 60
3 3

Apply the procedure for the succeeding months.

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Month
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov
Mot
orcy 60 70 50 90 10 80 150 70 110 150 130
cles

Computation for the Forecast on 5-month moving Average:

For the month of June – include the months prior to the
month of June (January, February, March, April, May)

60:70:50:90:10 280
June= = = 56
5 5

Apply the procedure for the succeeding months.

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Three- and Five-Month Moving Averages
Period Month Actual 3-Month 5-Month
Moving Moving
Demand Average Average
1 January 60 --- ---
2 February 70 --- ---
3 March 50 --- ---
4 April 90 60 ---
5 May 10 ---
6 June 80 56
7 July 150
8 August 70
9 September 110
10 October 150
11 November 130
12 December Source: Basic Quantitative
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Techniques by
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Three- and Five-Month Moving Averages
Period Month Actual 3-Month 5-Month
Moving Moving
Demand Average Average
1 January 60 --- ---
2 February 70 --- ---
3 March 50 --- ---
4 April 90 60 ---
5 May 10 70 ---
6 June 80 50 56
7 July 150 60 60
8 August 70 80 76
9 September 110 100 80
10 October 150 110 84
11 November 130 110 112
12 December Source: Basic Quantitative
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Techniques by
130 122 42
 Demand Forecast using Simple Moving Average
160

140

120
No. of Motorcycles

100

80

60

40

20

0
January February March April May June July August September October November December

Actual 3-Moving Aveages 5-Moving Averages

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Months Sirug
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 Weighted Moving Averages
A time series forecasting method in which
the most recent data are weighted heavier
compared to later data.

Example:

April = (1st weight given*corresponding data values) +

(2nd weight given*corresponding data values) +
(3rd weight given*corresponding data values)

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 Weighted Moving Averages
Example: The WSS motorcycle dealer in Quezon
Avenue area wants to accurately forecast the
demand for the WSS hybrid motorcycle during
the next month. Because the distributor is in
Germany, it is difficult to send motorcycle back
or recorded if the proper number of
motorcycles is not ordered a month ahead.
From sales records, the dealer has accumulated
the following data for the past 11 months.
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Determine the weighted moving averages forecast
on demand with the following weights
(a) 20%, 30%, and 50%
(b) 15%, 25%, and 60%

Month
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov
Mot
orcy 60 70 50 90 10 80 150 70 110 150 130
cles

(a) 20%, 30%, and 50%

Computation of Weighted Moving Average ( 20%, 30%, 50%)
April = (0.20)(60) + (0.30)(70) + (0.50)(50) = 12 + 21 + 25 = 58
May = (0.20)(70) + (0.30)(50) + (0.50)(90) = 14 + 15 + 45 = 74
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 Weighted Moving Average
Month Actual WMA WMA
Demand (20%, 30%, 50%) (15%, 25%, 60%)

January 60 --- ---

February 70 --- ---
March 50 --- ---
April 90 58 56.5
May 10
June 80
July 150
August 70
September 110
October 150
November 130
December -----
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 Weighted Moving Average
Month Actual WMA WMA
Demand (20%, 30%, 50%) (15%, 25%, 60%)

January 60 --- ---

February 70 --- ---
March 50 --- ---
April 90 58 56.5
May 10 74 77.0
June 80 42 36.0
July 150 61 64.0
August 70 101 111.5
September 110 96 91.5
October 150 106 106.0
November 130 122 128.0
December ----- 132
Source: Basic Quantitative
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Techniques by 132.0 48
 Weighted Moving Average
160

140

120

100

80

60

40

20

0
January February March April May June July August September October November December

Series1 Series2 Series3

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 Simple Exponential Smoothing
Exponential smoothing refers to family
forecasting models that are very similar to the
weighted moving average that weights the
most recent past data more than distant past
data.

Forecast = α(last value)+(1 – α)(last forecast)

Remember: α stands for the weighting factor referred to

as smoothing constant
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