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Break Even

In businesses Break-even (or break even), often abbreviated as B/E in finance, is the point of balance making neither a profit nor a loss. The term originates in finance but the concept has been applied in other fields

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78 views21 pages

Break Even

In businesses Break-even (or break even), often abbreviated as B/E in finance, is the point of balance making neither a profit nor a loss. The term originates in finance but the concept has been applied in other fields

Uploaded by

brainstorm
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Most business firms sells something.

They may sell either sell a physical


commodity like coffee or a service like
mobile phone repair. The amount of
money the firm receives for the sale of
goods or payment for the services they
render is called revenue.
On the other hand, the amont of money
the firm pays for production or the
expenses they spent for the product they
offer is called cost.
The difference between the revenue and
cost is called the profit.
When cost exceed revenue, there is a
negative profit or loss. The general
formula relating revenue, and cost is
given below:

Profit = Revenue - Cost


In simple business model, the number of
items produced and sold is represented
by a variable. For instance, if x cups of
coffee were sold for a price of 50 pesos
each, then we present revenue as:

Revenue = 50x
And suppose the expenses for a cup of
coffee is 25 pesos, then

Cost = 25x
This gives us
Profit = Revenue – Cost
=50x – 25x
=25x
Since profit, revenue, and cost are
functions of the variable x, we usually use
the function notation P(x) for profit, R(x)
for revenue and C(x) for cost. The
general formula may then be written as

P(x)= R(x) - C(x).


There are cases when the price of a
product are also expressed as a function
Q(x). Hence,

R(x)=Q(x). X
Usually, the price Q(x) represents the
demand function which relates the price
and the quantity demanded. The demand
function is a decreasing function since at
higher prices, less will be purchased.
60,000 −𝑥
Q(x)= as the monthly demand
20,000
for hamburgers of a fast-food restaurant,
set up the revenue function.
We use the formula for revenue function.
R(x) = Q(x) ∙ x
6𝑜,000−𝑥
= ∙x
20,000
60,000𝑥−𝑥 2
=
20,000
The cost is usually composed of two parts,
fixed costs and variable costs. Fixed costs
include such things as rent, basic telephone
expenses and utilities, loan or lease
payments and other necessary expenditure
that remain no matter how much of the
product is manufactured or sold. Variable
costs on the other hand, include expenses on
raw materials, direct labor, and energy that
vary or change directly with the amount of
product produced and sold.
It follows that the cost function C(x) is
expressed as

C(x) = V(x) + FC(x)

Where V(x) expresses the variable cost


function and FC(x) represents the fixed
cost function.
A firm that makes pencil plans on
producing x pencils a week. Based on
their production costs throughout the
years, they figure that it will cost them
5.00 pesos to make each pencil. There
will also be a cost for running the
equipment for a week that they figure to
be 3,500 pesos for the whole week,
regardless of how many pencils they
make. Set up the cost function
The variable cost V(x) is given as 5.00
pesos for each pencil, while the fixed
cost FC(x) is given as 3,500 pesos.

C(x) = V(x) + FC(x) = 5x + 3,500


The point at which neither profit nor loss.
Formula:
R(x) = C(x)
Assume that the level of fixed costs ( salaries,
rent, utilities) necessary to run Lara’s Coffee
Shop on a monthly basis is determined at
29,995 pesos. In addition, a cup of coffee that
is for sale at 50 pesos costs the shop 15 pesos
for the bulk coffee, filters and water. Do the
following.
Set up the revenue function and the cost
function.
What is the break-even quantity?
Determine the profit function.
How much profit is obtained when 2,000
cups are sold? At 5,000 cups?
How many cups must be sold to earn a
profit of 13,580 pesos?
Suppose a firm manufacturers hand
towels and sells them for 75 pesos each.
If the costs incurred in the production
and sale of the hand towels are 200,000
pesos plus 25 pesos for each hand towel
produced and sold, do the following.
Write the revenue, cost, and profit
function for the production and sale of x
hand towels.
Find the break-even point.

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