The document provides an example lesson on break even analysis, which is a technique for analyzing how revenue, expenses and profit vary with changes in sales volume. It includes two examples calculating break even points and profits/losses at different production levels. It also shows how to draw break even charts to illustrate the relationships between costs, revenue and production volume. The problem set includes additional practice problems calculating break even points, profits/losses and drawing break even charts based on given cost and revenue information.
The document provides an example lesson on break even analysis, which is a technique for analyzing how revenue, expenses and profit vary with changes in sales volume. It includes two examples calculating break even points and profits/losses at different production levels. It also shows how to draw break even charts to illustrate the relationships between costs, revenue and production volume. The problem set includes additional practice problems calculating break even points, profits/losses and drawing break even charts based on given cost and revenue information.
The document provides an example lesson on break even analysis, which is a technique for analyzing how revenue, expenses and profit vary with changes in sales volume. It includes two examples calculating break even points and profits/losses at different production levels. It also shows how to draw break even charts to illustrate the relationships between costs, revenue and production volume. The problem set includes additional practice problems calculating break even points, profits/losses and drawing break even charts based on given cost and revenue information.
The document provides an example lesson on break even analysis, which is a technique for analyzing how revenue, expenses and profit vary with changes in sales volume. It includes two examples calculating break even points and profits/losses at different production levels. It also shows how to draw break even charts to illustrate the relationships between costs, revenue and production volume. The problem set includes additional practice problems calculating break even points, profits/losses and drawing break even charts based on given cost and revenue information.
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LESSON 14
BREAK EVEN ANALYSIS
Break-Even Analysis - A technique for analyzing how revenue, expenses and profit vary with changes in sales volume . Assumptions: 1. All units are sold at a constant price per unit. 2. There is no income other than that of operations. 3. Variable costs are directly proportional to production rate from zero to 100% capacity. 4. Fixed Cost are constant regardless of the number of units produced.
Example 1 A company has a production capacity of 200 units per month and its fixed cost is P 20,000 per month. The variable cost per unit is P 300 and the unit can be sold for P 450. Economy measures are instituted to reduce the fixed cost by 10% and the variable cost by 20%. a. Compute the old and new break even point. b. Draw a break even chart. Solution: Let x = number of units to be produced and sold to break even. Then Total Cost = Total income to break even 20,000 + 300x = 450x x = 133.33 Production must be 133.33/200 = 66.67 % to break even.
If the fixed cost is reduced by 10% and the variable cost by 20% Then: 0.9(20,000) + 0.8 (300x) = 450x x = 85.7 Production is 85.7/200 = 42.9%
Graph: Graph y = 20,000 + 300x and y = 450x
Break Even Chart (old )
Break Even Chart ( Reduced Cost )
Example 2 A firm has the capacity to produce 1,000,000 units of product per year. At present, it is able to produce and sell only 600,000 units yearly at a total income of P 720,000. Annual fixed costs are P 250,000 and the variable cost per unit are 0.70. a. Compute the annual firms profit or loss for the present production. b. How many units must be sold annually to break even. c. Draw a break even chart.
Solution: Cost per product = 720,000 / 600,000 = 1.2 Expenses = 250,000 + 0.7x Income = 1.2x To break even: Expenses = Income 250,000 + 0.7x = 1.2x x = 500,000 units
Profit = Income – Expenses for x = 600,000 units
= 1.2(600,000) - [ 250,000 + 0.7(600,000) ] = P 50,000 Break Even Chart
PROBLEM SET 14 Name: _______________________________________ Score: ________ Subject and Section: ____________________________
1. A manufacturer producer certain items at a labor cost per unit of P 315, material cost per unit is P100, variable cost of P3.00 each. If the item has a selling price of P995, how many units must be manufactured each month for the manufacturer to breakeven if the monthly overhead is P461, 600? Draw the breakeven chart. Ans. X = 800 2. The annual maintenance cost of a machine shop is P69, 994. If the cost of making a forging is P56 per unit and its selling price is P135 per forge unit, find the number of units to be forged to break-even. If the number of units sold is 1000, what is the loss/profit? Draw the break even chart. Ans. 886 units , P 9006 profit.
3. A manufacturer produces certain item at a labor cost of P115 each, material cost of P76 each and variable cost of P2.32 each. If the item has a unit price of P600, how many units must be manufactured each month for the manufacturer to break even if the monthly overhead is P428, 000? Draw the breakeven chart. Ans. 1,053 units
4. Steel drum manufacturer incurs a yearly fixed operating cost of $ 200, 000. Each drum manufactured cost $ 160 to produce and sells $ 200. What is the manufacturer’s break-even sales volume in drums per year? Draw the break even chart. Ans. 5,000 drums 5. XYZ Corporation manufactures bookcases that sell for P 65.00 each. It costs XYZ Corporation P35, 000 per year to operate its plant. This sum includes rent, depreciation charges on equipment, and salary payments. If the cost to produce one bookcase is P50.00 how many cases must be sold each year for XYZ to avoid taking a loss? Ans. 2,334 cases
6 A company which manufactures electric motors has a production capacity of 200 motors a month. The variable costs are P150.00 per motor. The average selling price of the motors is P275.00 Fixed cost of the company amount to P20,000 per month which includes taxes. Find the number of motor that must be sold each month to breakeven. If the company sold 135 motors, find the profit or loss. Draw the break even chart. Ans. 160 Motors
7. The annual maintenance cost of a machine is P70, 000. If cost of making a forging is P56 and its selling price is P 125 per forged unit. Find the number of units to be forged to break even. Ans. 1,015 units
8. Compute for the number of blocks that an ice plant must be able to sell per month to break even based on the following data: Cost of electricity per block - P 20.00 Tax to be paid per block - P 2.00 Real Estate Tax - P 3,500.00 per month Salaries and Wages - P25, 000.00 per month Others - P12, 000.00 per month Selling price of ice - P 55.00 per block Draw the break even chart. Ans. 1,228 blocks
9. A telephone switchboard 100 pair cable can be made up with either enameled wire or tinned wire. There will be 400 soldered connections. The cost of soldering a connection on the enameled wire will be P 1.65, on the tinned wire, it will be P1.15. a 100 – pair cable made up with enameled wire cost P 0.55 per linear foot and those made up of tinned wire cost P0.75 per linear foot. Determine the length of cable run in feet so that the cost of each installation would be the same. Ans. 1,000
10. A new Civil Engineer produces a certain construction material at a labor cost of P16. 20 per piece, material cost of P38.50 per piece and variable cost of P7.40 per piece. The fixed charge on the business is P100, 000.00 per month. If he sells the finished product at P95 each, how many pieces must be manufactured in each month to break even? Ans. 3040 pieces
