MODULE

BREAKEVEN ANALYSIS

Learning Objective: At the end of the module, the students will be illustrate breakeven for
investigating variability in outcomes of engineering projects

Content : 1. Breakeven Analysis

2. Breakeven Chart

In engineering economy, many situations are encountered where the cost of two or more
alternatives may be affected by a common variable. Break-even point is the value of the variable
from which the costs for the alternatives will be equal.
C1 = f1(x) and C2 = f2(x)
where:
C1 = certain specified total cost applicable to Alternative 1
C2 = certain specified total cost applicable to Alternative 2
x = a common independent variable affecting Alternative 1 and Alternative 2.
The break-even point is where C1 and C2 are equal,
f1 (x) = f2 (x)
which may be solved for x, the break-even point

BREAK-EVEN CHART
Break-even chart is the graphical representation of break-even analysis. The break-even
point is the quantity of production at which the income is equal to total cost. It is the intersection of
the income line and the total cot line on the break-even chart.
When two alternatives are to be compared, the break-even point is the intersection of the
total cost line for each alternative on the break-even chart.

(4-1) Two machines are being considered for the production of a particular part for which there is a
long-term demand. Machine A costs P50,000 and is expected to last 3 years and have a P10,000
salvage value. Machine B costs P75,000 and is expected to last 6 years and have zero salvage
value. Machine A can produce a part in 18 seconds; Machine B requires only 12 seconds per part.
The out-of- pocket hourly cost of operation is P38 for A and P30 for B. Monthly maintenance costs
are P200 for A and P220 for B.
If interest on invested capital is 25%, determine the number of parts per year at which the machines
are equally economical. If the expected number of parts per year is greater than this break-even
quantity, which machine would be favored?
Solution:
Let x = number of parts per year for equal costs

Machine A
Annual costs:
Depreciation = ( 50,000 − 10,000)/(
⁄ , 25%, 3)
= P10,492
= 40,000
/3.8125
Maintenance = ( 200)(12) = 2400
Operation = ( 38)(18/3600)( ) = 0.19x
Interest on = ( 50,000)(0.25)
= 12,500
capital
Total Annual Cost P25,392+0.19x

Machine B
Annual costs:
Depreciation = 75,000/(
⁄ , 25%, 6) = P6,661
= 75,000/11.2588
Maintenance = ( 220)(12) = 2640
Operation = ( 30)(12/3600)( ) = 0.10x
Interest on = ( 75,000)(0.25)
= 18,750
capital
Total Annual Cost P28,051+0.10x

Equating total annual costs,

P25,392 + P0.19x = P28,051 + P0.10x
x = 29,544 parts

(4-2) Two electric motors are being considered to power an industrial hoist. Each is capable on
providing 100hp. Pertinent data for each motor are as follows:
Motor A Motor B
Investment P25,000 P32,000
Electrical efficiency 84% 88%
Maintenance per year 400 600
Life, years 10 10
Money is worth 20%. If the expected usage of the hoist is 700 hours per year, what would the cost
of electrical power have to be before Motor A is favored over Motor B?

Solution:
Let x = cost of electrical power for both motors to be equally economical

Motor A
Annual costs:
Depreciation = 25,000/( ⁄ , 20%, 10)
= 25,000 = P963
/25.9587
Power = ((100)(0.746)(700)( ))
= 62,167x
/0.84
Maintenance = 400
Interest on = ( 25,000)(0.20)
= 5,000
capital
Total Annual Cost P6,363 +
62,167x

Machine B
Annual costs:
 Depreciation = 32,000/( ⁄ , 20%, 10)
= 32,000 = P1,232
/25.9587
Power = ((100)(0.746)(700)( ))
= 59,341x
/0.88
Maintenance = 600
Interest on = ( 32,000)(0.20)
= 6,400
capital
Total Annual Cost P8,232 +
59,341x
Equating total annual costs,
P6,363+ P62,167x = P8,232 + P59,341x
x = P0.6614 per kwh

(4-3) The cost of producing a small transistor radio set consists of P23.00 for labor and P37.00 for
materials. The fixed charges in operating the plant are P100,000 per month. The variable cost is
P1.00 per set. The radio set can be sold for P75.00 each. Determine how many sets must be
produced per month to break-even.

Solution:
Let x = number of sets to be produced per month to breakeven

Total Income = P75x

Total Cost = P100,000 + (P23 + P37 + P1)x
= P100,000 + P61x

To breakeven
Income = Cost
P75x = P100,000 + P61x
x = 7,143 sets

(4-4) A company has a production capacity of 500 units per month and its fixed costs are P250,000
a month. The variable costs per unit are P1,150 and each unit can be sold for P2,000. Economy
measures are instituted to reduce the fixed costs by 10 per cent and the variable costs by 20 per
cent. Determine the old and the new break even points. What are the old and the new profit at 100
per cent capacity?

Solution:

Income = P2,000 per unit

Old fixed costs = P250,000 per month
Old variable costs = P1,150 per unit

Let x = old breakeven point

Income = Cost
P2000x = P250,000+ P1,150x
x = 294 units per month

Old = (P2,000)(500) – P250,000 – (P1,150)(500)

profit
= P175,000 per month

New fixed costs = (P250,000)(0.90) = P225,000

New variable costs = (P1,150)(0.80) = P920 per unit

Let y = new breakeven point

Income = Cost
P2000y = P225,000 + P920y
y = 208 units per month
 New = (P2,000)(500) – P225,000 – (P920)(500)
profit
= P315,000 per month

(4-5) A local factory assembling calculators produces 400 units per month and sells them at P1,800
each. Dividends are 8% on the 8,000 shares with par value of P250 each. The fixed operating cost
per month is P25,000. Other costs are P1,000 per unit. Determine the break-even point. If only 200
units were produced per month, deter- mine the profit or loss.

Solution:
Income = P1,800 per unit
Fixed costs = P25,000 per month
Variable costs = P1,000 per unit
Dividend = 8% per year

Let x = number of calculators per month to breakeven

Income = Cost
P1,800x = P25,000+ P1,000x
x = 31.25 say 32 units

(P250)(0.08)(8,000)
Dividend = 12
=P13,333 per month

Income = Total cost + Dividend + Profit/Loss

For 200 units:
(P1,800)(200) = P25,000 + (P1,000)(200) + P13,333 + Profit/Loss
Profit = P121,667 per month

(4-6) Accompany manufacturing calculators has a capacity of 200 units a month. The variable costs
are P1,000 per unit. The average selling price of the calculators is P2.500. Fixed costs of the
company amount to P150,000 per month, which include all taxes. The company pays an annual
dividend of P12 per share on each of the 30,000 shares of common stocks.
(a) Determine the number of calculators that must be sold each month to break-even and the sales
volume corresponding to the unhealthy point.
(b) What is the profit or loss if 150 units were produced and sold a month?
("Unhealthy point" is the sales volume at which the business will be able to pay exactly the desired
rate of dividend)

Solution:
Income = P2,500 per unit
Fixed costs = P150,000 per month
Variable costs = P1,000 per unit
Dividend = P12 per share per year

(a) Let x = breakeven point

Income = Cost
P2,500x = P150,000+ P1,000x
x = 100 units per month

(P12)(30,000)
Dividend = 12
=P30,000 per month

Let y = the unhealthy point

At the unhealthy point,
Income = Cost + Dividend
P2,500y = P150,000+ P1,000y + P30,000
y = 120 units per month
 (b) Income = Total cost + Dividend + Profit/Loss
For 200 units:
(P2,500)(150) = P150,000 + (P1,000)(150) + P30,000 + Profit/Loss
Profit = P45,000 per month

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Reference:
Sta. Maria, H.B. (2000). Engineering Economy (3rd Ed). National Book Store
Sullivan, W.G., et al (2015). Understanding Engineering Economy (16th Ed). Pearson Education Inc.