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Break-Even Analysis

This document outlines a module on break-even analysis. It includes learning objectives around determining break-even points for linear and non-linear functions. It also discusses evaluating the relationship between break-even quantity, revenue, and costs. The document defines key break-even analysis terms like fixed and variable costs. It describes the components of break-even analysis like volume, profit, and costs. Finally, it explains the graphical approach to visualizing the break-even point where total revenue and total costs intersect.

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0% found this document useful (0 votes)

50 views38 pages

Break-Even Analysis

Uploaded by

mname7612

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Download as PDF, TXT or read online on Scribd

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Simplified Module in Management

Science

6
Module No.

Summer Class 2020

Angelita Mando

July 20, 2021 Module 6: Break-Even Analysis

Learning Objectives:
Determine the break-even point on linear function.

Determine the critical points of a non-linear functions.

Evaluate the relation of the break-even point quantity and

revenue to the total revenue and total cost function.

Analyze the changes of the selling price, variable cost and

fixed cost of the break-even quantity.

July 20, 2021 Module 6: Break-Even Analysis

Basic Concepts

Lesson No.
1 Ø Definitions

Ø Components

Ø Fixed and Variable Costs

Ø Notations

Ø Graphical Approach

July 20, 2021 Module 6: Break-Even Analysis

Linear and Non-Linear
Profit Analysis

Lesson No.
2 Ø LPA Problem

Ø LPA Solution

Ø NLPA Problem

Ø NLPA Solution

July 20, 2021 Module 6: Break-Even Analysis

Simplified Module in Management
Science

6
Module No.

Summer Class 2020

Angelita Mando

July 20, 2021 Module 5: Linear Programming: Assignment Method

Ø Definitions Ø Fixed and Variable
Ø Components
Costs
Ø Graphical
Ø Notations
Approach

Break-Even Analysis
- the determination of the number of units that must be produced and sold
to equate total sales with total cost

- the simplest model used by decision maker

- Interrelationships of costs, volume, and profit

Break-Even Analysis is also referred to as cost-volume

analysis.

Break-even point is the volume of sales for which total sales equals total costs where
the profit is equal to 0.

July 20, 2021 Module 6: Break-Even Analysis

Ø Definitions Ø Fixed and Variable
Ø Components
Costs
Ø Graphical
Ø Notations
Approach

Components of Break-Even
Analysis
Volume Ø the level of production by a company, which is expressed as the
number of units (quantity) produced and sold

Profit

Cost

July 20, 2021 Module 6: Break-Even Analysis

Ø Definitions Ø Fixed and Variable
Ø Components
Costs
Ø Graphical
Ø Notations
Approach

Components of Break-Even
Analysis
Volume

Profit Ø the difference between total sales and total cost or the income
generated by the sale of a product

Cost

July 20, 2021 Module 6: Break-Even Analysis

Ø Definitions Ø Fixed and Variable
Ø Components
Costs
Ø Graphical
Ø Notations
Approach

Components of Break-Even
Analysis
Volume

Profit

Cost Ø the usual number pf different costs that must be taken into
account in order to determine profit

July 20, 2021 Module 6: Break-Even Analysis

Ø Definitions Ø Fixed and Variable
Ø Components
Costs
Ø Graphical
Ø Notations
Approach

Fixed and Variable Costs

Ø the cost that is independent of the volume of units produced Fixed Cost

Ø remains the same regardless of the volume of sales

Variable Cost

Examples:

Ø rental, management salaries, some forms of depreciation, property

taxes, etc.

July 20, 2021 Module 6: Break-Even Analysis

Ø Definitions Ø Fixed and Variable
Ø Components
Costs
Ø Graphical
Ø Notations
Approach

Fixed and Variable Costs

Ø the cost that is determined on a per-unit basis Fixed Cost

Ø grows in direct proportion to the volume of sales

Variable Cost

Examples:

Ø material costs, direct labor costs in manufacturing, utilities directly

affecting production , etc.

July 20, 2021 Module 6: Break-Even Analysis

Ø Definitions Ø Fixed and Variable
Ø Components
Costs
Ø Graphical
Ø Notations
Approach

Notations Used for 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

July 20, 2021 Module 6: Break-Even Analysis

Ø Definitions Ø Fixed and Variable
Ø Components
Costs
Ø Graphical
Ø Notations
Approach

Graphical Approach of Break-Even

Analysis It requires both graphs of cost function
and revenue function.

July 20, 2021 Module 6: Break-Even Analysis

Ø Definitions Ø Fixed and Variable
Ø Components
Costs
Ø Graphical
Ø Notations
Approach

Graphical Approach of Break-Even

Analysis - Figure 1.1 shows the equations plotted on the same set of axes.
- The chart above illustrates both cost function and revenue
function.
- The intersection of the Total Revenue (TR) and Total Cost (TC)
lines, total revenue equals total cost, and the company will
break-even.
- The sales volume at this break-even point is the break-even
volume.
- At higher sales, the business will generate a profit because the
revenue line is higher than the cost line.
- The profit is the vertical separation of the lines above the break-
even point.
- In any given sales volume to the left of the break-even point,
which means that the total cost covered total revenue, and the
size of the loss is determined by the vertical separation of the
lines of TR and TC .
July 20, 2021
- At zero salesModule
volume, there are no sales volume and or variable
6: Break-Even Analysis
July 20, 2021 Module 4: Linear Programming: Transportation Method
July 20, 2021 Module 6: Break-Even Analysis
Simplified Module in Management
Science

6
Module No.