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Subject : Management Science
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Module 8: Break – Even Point Analysis

Intended Learning Outcomes
 Describe the Break-Even Point
 Discuss the Total Revenue, Total Cost and Profit Functions
 Compute the Break-Even Point as a Linear Function
 Compute the Break-Even Point as Non-Linear Function
 Discuss the Basic Rules for Derivatives
 Locate the critical points
 Apply Maxima and Minima in Business

Activity
As we start this lesson please review your accounting computation for a
business’ operation outcome / entity’s income.

Analysis
A business operation may either result into profit, loss or breakeven. This is
what you have learned in your basic accounting subjects. In this module, we will look
not just into the financial reporting of business operations but on its managerial aspect.
In this module, we will dig deep into learning how to identify the number of sale which
will put the business to result into a break-even with the intention of using such
information to make managerial decisions which will help keep the business operate at
profit.

A break-even analysis results in neither a profit nor a loss. Instead, it

determines the number of sales needed to cover all variable and fixed costs. It
calculates the minimum number of units to sell and the sales volume needed to pay all
expenses before making a profit.

Abstraction
\

1. Break-Even Point (BEP)

The common point between the total revenue and the total cost is call the break-even
point. At this point the total revenue equals the total cost. The company has no profit
but has no loss.
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Total Revenue xx 100

Less: Expenses/Cost (xx) (100)
Profit/(Loss)/BE xx 0 BE
BREAK EVEN: TR = TC

2. Total Revenue, Total Cost and Profit Functions (Equations)

 The total revenue (TR) is obtained by finding the product(multiply) of the selling
price per unit by the number of units sold

TR = NUMBER OF UNIT SOLD X UNIT SELLING PRICE

Example: Product = ice, you sell it at P1 per piece. On May 1 you sold 5
pieces, on May 2 you sold 10 pcs, May 3 – 5 pcs

TOTAL REVENUE
TR = UNITS SOLD X SP PER UNIT

Let x = number of units

TR = 1x; TR = x
TR = 20 pcs x 1 = 20

Example: Sold = 100

TR = 1x
TR = 100

EXAMPLE 2:
Each unit of calculator is sold at P300 per unit. The company made the following
sales for the first week of May:
May 2 - 5 units
May 3 - 10 units
May 4 - 1 unit
May 5 - 3 units
May 6 - 20 units
Total - 39 units

TR = selling price per unit (number of units sold)

Selling price per unit (constant) = 300
Number of units sold (variable) = let x

TR =300x

Applying it in the example:

TR = 300x
TR = 300 (39)
TR = 11, 700
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 Total cost (TC) is obtained by finding the sum of the fixed cost (FC) and
variable cost (VC).

TOTAL COST = FIXED COST + VARIABLE COST

Example:
Car Wash Business:
Expenses / Costs
WATER – P15 / cubic meter (1 cubic per car)
10 cars = 10 cubic meter (15) = 150
2 cars = 2 cubic meter (15) = 30
0 car = 0 cubic meter (15) = 0

SOAP – P15 / sachet (1 sachet per car)

10 cars = 10 sachets (15) = 150
2 cars = 2 sachets (15) = 30
0 car = 0 sachet (15) = 0

SALARIES – 5, 000 per month

10 cars = 5, 000 (salaries)
2 cars = 5, 000 (salaries)
0 car = 5, 000 (salaries)

RENTAL – 10, 000 per month

10 cars =10, 000 rent
2 cars = 10, 000 rent
0 car = 10, 000 rent

FIXED – the change of this cost is not dependent on the number of units
produced or sold. = constant
= 5, 000 + 10, 000
= 15, 000 (total)

VARIABLE COST – the change of this cost is dependent on the number of

units produced or sold. = variable cost per unit x number units
= 15 + 15 = 30 / unit
TOTAL COST = FC + VC
= fc + (vc per unit )(number of units)
TC = 15, 000 + 30x
Example: serviced 10 cars
TC = 15, 000 + 30 (10)
TC = 15, 000 + 300
TC = 15, 300

PROFIT FUNCTION: (Profit = Revenue – Total Cost)

- PROFIT = TOTAL REVENUE – TOTAL COST
- PROFIT = TR – TC
- PROFIT = 1x – (15, 000 + 30x)

BEP
Total Revenue = Total Cost
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TR = TC
SP per unit (Number of units) = FC + variable cost per unit (number of
units)

X = 15, 000 + 30x

Number of units (SP per unit) = fc + (vc per unit)(number of units)

 Fixed cost (FC) is constant while the variable cost represents the cost of
production per unit. The following formula should be remembered:

TR = selling price per unit times the number of unit sold

TC = FC + VC, (where VC = cost per unit times the number of units)
Profit = TR – TC
At break-even point, TR = TC or TR – TC = 0 or Profit = 0

3. Sample Problem
A firm sells its product at ₱6 per unit (SP per unit). The product has a variable cost
of ₱3 per unit (VC/unit) and the Company’s fixed cost is ₱9,000 (fixed cost).
Determine each of the following:

a. TR (Total revenue), TC (total cost) and profit function

Let x = number of units

TR = unit selling price (units sold)

TR = 6 (x)
TR = 6x

TC = FC + VC
TC = fc + vc per unit (number of units)
TC = 9, 000 + 3 (x)
TC = 9, 000 + 3x

P = TR – TC
P = 6x – (9, 000 + 3x)

b. Sales volume (number of units) when profit is ₱9,000

P = 6x – (9, 000 + 3x)

i. Asked = volume / number of units / x
ii. given:
Profit Function: P = 6x – (9, 000 + 3x) – derived in previous computation
Profit = 9, 000 (P)

P = 6x – (9, 000 + 3x)

9, 000 = 6X – (9, 000 + 3X)
9, 000 = 6x - 9, 000 – 3x
-6x + 3x = -9, 000 – 9, 000
-3x = -18, 000
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−3 x −18,000
=
−3 −3
x=6 , 000

Always round up

(x = number of units)
Checking:
TR = 6x = 6 (6, 000) = 36, 000
TC = 9, 000 + 3x = 9, 000 + 3(6, 000) = 9, 000 + 18, 000 = 27, 000
P = TR – TC = 36, 000 – 27, 000 = 9, 000

c. Profit when sales are 600 units

P = 6x – (9, 000 + 3x)
= 6(600) – (9, 000 + 3(600))
= 3,600 – (9,000 + 1, 800)
= 3, 600 - 9, 000 – 1, 800
P = -7, 200 OR 7,200 LOSS

Checking:
P = 6x – (9, 000 + 3x)
-7, 200 = 6x –(9, 000 + 3x)
-7,200 = 6x – 9, 000 – 3x
-6x+3x = -9, 000 + 7,200
-3x = -1, 800
−3 x −1,800
=
−3 −3
x=600

d. The break-even (PROFIT =0) quantity (number of units) revenue

P = 6x – (9, 000 + 3x)
0 = 6x – (9, 000 + 3x)
0 = 6x – 9, 000 – 3x
-6x +3x = -9,000 - 0
−3 x=−9 , 000
−3 x −9,000
=
−3 −3
x=3 , 000 units( BEP∈units)
Or total sales / revenue: TR = 6x = 6(3, 000) = 18, 000 (BEP in pesos or in total revenue)

Checking
P = 6x – (9, 000 + 3x)
P = 6 (3, 000) – (9, 000 + 3(3,000))
P = 18, 000 – (9, 000 +9,000)
P = 18, 000 – 18, 000
P=0

e. The amount by which the variable cost per unit has to be decreased or
increased for the firm to break-even at 2,000 units. Assume that the selling
price and the fixed cost remain constant.
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What is asked? New VC/unit, compare with the old, compute the increase or
decrease.
What are the given?
SP = P6
FC = 9, 000
X = 2, 000
P = 0 (computing for break even point)
Solution:
Let y be the new vc per unit
P = 6x – (9,000 + 3x) = old profit function using the old VC per unit
P = 6x – (9, 000 + ?x) = new profit function using new VC per unit
0 = 6 (2, 000) – (9, 000 +y(2, 000))
0 = 12, 000 – (9, 000 + 2, 000 y)
0 = 12, 000 – 9, 000 – 2,000y
2, 000y = 12,000- 9, 000
2, 000 y = 3, 000
( 2,000 y ) 3,000
=
2,000 ( 2,000 )
y=1.5 (new vc per unit)
VC per unit BEP (units) BEP (pesos)/sales
= BEP (units) x SP
Old P3 /unit 3, 000 3, 000 x P6 = P18, 000
Ne P1.5/unit 2, 000 2,000 x P6 = P12, 000
w
Decrease VC per unit
by 1.5 pesos (3 - 1.5)

f. The new selling price per unit in order to break-even at 300 units, assuming
the FC and VC remain constant.

a. New selling price? (let z)

b. FC = 9, 000; VC per unit = 3; x = 300 units; P (profit) = 0

Let z – new selling price

c. P = 6x – (9, 000 + 3x) = original profit function using the original selling price (BE = 3,
000)
P = ?x – (9, 000 + 3x) = new profit function using a new selling price (BE = 300)
P = zx – (9,000 + 3x)
0 = z(300) – (9, 000 + 3(300))
0 = 300z – (9,000 +900)
0 = 300z – 9, 900
-300z=-9,900
−300 z −9900
=
−300 −300
z=33 (new selling price)

SP per unit BEP (units) BEP (pesos) = BEP

(units) x SP
Old P6 /unit 3, 000 3, 000 x P6 = P18, 000
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TC = 9, 000 + 3x
TC = 9, 000 + 3(3000)
TC = 9, 000 + 9, 000
TC = 18, 000
Ne 33/unit 300 300 x P33 = P9, 900
w TC = 9, 000 + 3x
TC = 9 000 + 3 (300)
TC = 9, 000 + 900
TC = 9, 900
NEW SELLING
PRICE: P33

g. Number of units to sell to cover the fixed cost.

X / number of units?
Revenue can cover the fixed cost
TR = TFC
6x = 9,000
6 x 9,000
=
6 6
x=1,500 units

Application

Genevieve Co. sells product in a competitive industry. Data about the company is as follows:
Genevieve Co.
Fixed Costs P50, 000
Selling Price per unit P25
Variable cost per unit P5

Compute the following:

1. Derive the TR, TC, and P functions
2. Find the Break-even point (in units and in pesos) of Genevieve Co.
3. If Genevieve Co. desires to earn profit of P20, 000, how much sales (units x cost per unit) should
it generate?
4. How much sales must be generated to earn profit that is 8% of such sales?
5. If fixed cost would increase by P20, 000, the break-even point will increase (decrease) by
____________.
6. If the variable cost per unit will go up by P5 per unit, the break-even point will increase
(decrease) by ___________.
7. How much is the break-even point if the selling price per unit will increase to P30?

 Sales = number of units x selling price per unit = total revenue

*** NOTHING FOLLOWS ***