Engineering Economy: Lesson 4 - Break Even Analysis
Engineering Economy: Lesson 4 - Break Even Analysis
ECONOMY
LESSON 4 – BREAK EVEN ANALYSIS
BREAK-EVEN ANALYSIS
The main objective of break-even analysis is to find the cut-off production
volume from where a firm will make profit. Let;
The total sales revenue (S) of the firm is given by the following formula:
= *
BREAK-EVEN ANALYSIS
The total cost of the firm for a given production volume is given as
= +
=v* +
BREAK-EVEN ANALYSIS
The linear plots of the above two equations are shown in Figure below
The intersection point of the total sales revenue line and the total cost
line
is called the break-even point.
The corresponding volume of production on the X-axis is known as the
break-even sales quantity.
At the intersection point, the total cost is equal to the total revenue. This
point is also called the no-loss or no-gain situation.
For any production quantity which is less than the break-even quantity,
the total cost is more than the total revenue. Hence, the firm will be
making loss.
BREAK-EVEN ANALYSIS
BREAK-EVEN ANALYSIS
Profit = Sales – ( Fixed cost + Variable costs)
= (s * Q) – (FC + v * Q)
Break – even quantity = Fixed Cost / (Selling price per unit – Variable cost per unit)
= FC / (S – V)
Break – even sales = [Fixed Cost / (Selling price per unit – Variable cost per unit)](s)
= [FC / (S – V)]s
BREAK-EVEN ANALYSIS
The contribution is the difference between the sales and the variable costs.
The margin of safety (M.S.) is the sales over and above the break-even sales.
s = ₱4,278/hour
v = ₱3,100/hour
FC = ₱101,200,000
M = 160,000 hours
A. Break – even quantity = Fixed Cost / (Selling price per unit – Variable cost per unit)
= FC / (s – v)
= 85,908.32 hours
= 53.69 %
BREAK-EVEN ANALYSIS
B. Break – even sales = [Fixed Cost / (Selling price per unit – Variable cost per unit)](Selling Price per unit)
= [FC / (S – V)]s
=[ (₱101,200,000)/( ₱4,278/hour - ₱3,100/hour)] x ₱4,278/hour
= ₱ 367,515,793.00
C. Q = 130,000 hours
(1) Contribution = Sales – Variable Cost
= ( s * Q ) – ( v * Q)
= (₱4,278/hour * 130,000 hours) – ( ₱3,100/hour * 130,000 hours)
= ₱153,140,000.00
BREAK-EVEN ANALYSIS
(2) Margin of Safety (M.S.) = Actual sales – Break even sales 1st eq’n
= ₱ 556,140,000 - ₱367,515,793
= ₱ 188,624,207
BREAK-EVEN ANALYSIS
Using 2nd eqn
Profit = Sales – ( Fixed cost + Variable costs)
= (s * Q) – (FC + v * Q)
= (₱4,278/hour * 130,000 hours) – (₱101,200,000 + ₱3,100/hour *
130,000 hours)
= ₱ 556,140,000 – ₱ 504,200,000
= ₱ 51,940,000
= ₱ 188,624,207
BREAK-EVEN ANALYSIS
SEATWORK : SOLVE LETTER D
PROFIT/VOLUME RATIO (P/V RATIO)
The Profit Volume (P/V) Ratio is the measurement of the rate of change of
profit due to change in volume of sales. It is one of the important ratios for
computing profitability as it indicates contribution earned with respect of
sales.
The following formula helps us find the Margin of Safety (M.S.) using the P/V ratio:
Sales = ₱120,000
Fixed cost = ₱25,000
Variable cost = ₱45,000
Find the following:
(a) Contribution
(b) Profit
(c) BEP
(d) M.S.
PROFIT/VOLUME RATIO (P/V RATIO)
a. Contribution = Sales – Variable Cost
= ₱120,000 - ₱45,000
= ₱75,000
= ₱50,000
PROFIT/VOLUME RATIO (P/V RATIO)
c. BEP = Fixed Cost / P/V Ratio
= ₱75,000 / ₱120,000
= 0.625 or 62.50%
= ₱40,000
PROFIT/VOLUME RATIO (P/V RATIO)