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Break Even

The document defines key terms related to profit, loss, revenue, costs and break-even analysis. It provides an example problem about a coffee shop owner calculating break-even point. The owner sells coffee for ₱50 per cup, with fixed costs of ₱40,000 and variable costs of ₱10 per cup. The break-even point is 1,000 cups per month, where total revenue equals total costs. The owner would make a profit selling 1,500 cups or more each month.

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Maxine Garra
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2K views44 pages

Break Even

The document defines key terms related to profit, loss, revenue, costs and break-even analysis. It provides an example problem about a coffee shop owner calculating break-even point. The owner sells coffee for ₱50 per cup, with fixed costs of ₱40,000 and variable costs of ₱10 per cup. The break-even point is 1,000 cups per month, where total revenue equals total costs. The owner would make a profit selling 1,500 cups or more each month.

Uploaded by

Maxine Garra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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DEFINITION OF TERMS

PROFIT – a financial gain


LOSS - loss of money or
decrease in financial value
When total cost is
higher than revenue
= LOSS

When revenue is
higher than total cost
= PROFIT
BREAK-EVEN
ANALYSIS
Significant in examining
the relationship among
various elements such as
01 COSTS

02 PRICES

03 VOLUME OF SALES

04 REVENUE = TOTAL COST


TWO TYPES
OF COST
01 FIXED COST

02 VARIABLE COST
The cost necessary to keep the
FIXED business running regardless of
the sales volume.
COST Ex:

Rent, salaries of employees,


loans, basic utilities and
other necessary
expenditures.
VARIABLE
COST The cost of
producing each
product .
REVENUE
- It is the product of
price and the quantity
sold.
- It is usually seen on the
top item in an income
(profit and loss)
statement from which all
costs and expenses is
subtracted to arrive at
net income
INCOME
STATEMENT
EXAMPLE OF
LISTED
COMPANIES
The revenue ( R ) is
given by:

R = p· x
At break-even,

TC = R
Recall from the
previous discussion,

Profit= Revenue - Cost


Recall from the
previous discussion,
Profit = 0 thus,
Revenue – Cost = 0
This is known as:

BREAK-
EVEN
Jongga is planning to run a coffee shop
where he plans to sell each cup of coffee at
₱50. He assumed that the fixed cost he
needs to pay on a monthly basis amounts to
₱40,000 which includes all his expenses like
the amount he needs to pay for the rent,
wages for his employees, his basic expenses
and etc. So, even if Jongga has no sales, he
is still obliged to pay this amount.
If a cup of coffee costs Jongga ₱10 for the
bulk of grind coffee beans, purified water
and coffee filters.
a) Draw the break-even chart.
b) What is the break-even quantity?

c) How much profit will he earn if he


sells 500 cups? 1500 cups?
If a cup of coffee costs Jongga ₱10 for the
bulk of grind coffee beans, purified water
and coffee filters.

d) How many cups must be sold


to earn a profit of ₱40,000?
Solution
In the problem, Jongga estimated that the
fixed cost he needs to pay every month is
given by

FC = 40,000
The variable cost is VC= 10x since it will cost him
₱10 a cup. So, for 2 cups the cost is ₱20, for 3 cups
is ₱30, and so on.

The total cost is the sum of the fixed


cost and variable cost. That is,

TC = FC + VC,
where TC is the total cost, and FC and
VC are fixed cost and variable cost,
respectively. Jongga coffee shop’s
total cost is TC=40,000 + 10x, where x
is the number of cups of coffee.
The revenue in the problem, therefore,

is R = p· x = 50x
a. The break-even chart is illustrated
in the next slide. Note that the x-axis is
the quantity (number of cups of
coffee sold), while y-axis is the
amount in thousands of pesos.
80000

70000

R = 50x
TC = 40000 + 10x
60000

50000

40000
(1,000, 50,000)

30000

20000

10000

0
0
0 500 1000 1500 2000 2500 3000 3500 4000
b. At break-even, TC = R, so

50x = 40,000 = 10x


40x = 40,000
x = 1,000
c. P = TC – R
We wish to find the profit when x = 500
P = 50x – (40,000 = 10x)
P = 40x – 40,000
= 40(500) – 40,000 = -20,000
Observe that P < 0 when x = 500, which
means that the business will incur loss.
When x = 1,500 cups, the profit is given
by P = 40(1,500) – 40,000 = ₱20,000.
The value of P here is positive which
implies that there is profit when x= 1500.
The coffee shop will earn ₱20,000.
d. To earn a profit of ₱40,000, we equate
P = 40,000.

40x – 40,000 = 40,000


Solving for X, we get
YAY!

x = 2,000
This means that, in order to
earn a profit of ₱40,000,
Jongga must sell 2,000 cups of
coffee in a month.
A store owner sells 1 whole pad paper at
₱10 per pad. His fixed cost is ₱5,000, and
the variable cost is ₱5 per pad.

a. At what level of production (that’s,


number of whole pad paper) will the
business owner have a PROFIT of
₱2,000? A LOSS of ₱1,000?
b. How many pad papers will he break
even?

c. Find the break-even point.


Solution
a. P = R – TC = 10x – (5000 + 5x) = 5x – 5000
P = 2000
2000 = 5x – 5000
x = 1400
To obtain a loss of 1000, we set P = -1000
and solve for x;
-1000 = 5x – 5000
4000 = 5x Therefore, x = 800
b. P = 5x – 5,000 = 0
x = 1,000 pad papers

c. When x = 1000, we get


R = 10(1,000) = 10,000.

Hence, the break-even point is (1,000,


10,000)
Suppose that the total cost (in pesos)
of a business is TC = 30 + 2x, and the
unit price (in pesos) of a certain
commodity is p = 15 – x.
a. Write the revenue function.
b. Write the profit function.
c. Find the Break-even point.
d. How many units are needed to earn
a profit of ₱ 10?
Solution
a. R = px = (15 – x)x = 15x – x2

b. P = R – TC = (15x – x2) – (30 + 2x)


= -x2 + 13x - 30

c. 15x – x2 = 30 + 2x
0 = x2 +2x – 15x + 30
0 = x2 – 13x + 30
x=3 or x = 10
Break even points : (3, 36), (10, 50)

d. P = 10 = -x2 + 13x – 30
0 = -x2 + 13x – 40
0 = x2 – 13x + 40
x = 5 or x = 8

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