ENGINEERING ECONOMY

LESSON 13 - 15 : BREAK – EVEN ANALYSIS

ENGINEERING ECONOMY
BREAK – EVEN ANALYSIS
Learning Objectives
At the end of the lesson, the learner is expected to:
 Determine the definition of break even point.

 Differentiate between fixed and variable costs.

 Calculate the break even point.

 Understand the concept of break even analysis.

 Apply the theories, principles for engineering and related projects

involving cost.
BREAK – EVEN ANALYSIS
 BREAK EVEN ANALYSIS

 Is used to determine the breakeven cost which is the cost at which the total
income is exactly equal to the total expenses incurred in the business.
 Profit

 Total Revenue is the total receipts a seller can attain from selling goods on
services to buyers.
 Total cost
BREAK – EVEN ANALYSIS
 FIXED PERCENTAGE OF GROSS INCOME OR 50% OF THE NET
TAXABLE INCOME
 Business costs, such as rent that are constant whatever the quantity of
goods or services produced.
 Example: Depreciation, interest expense, amortization, property taxes,
rent, salaries, utilities.
 VARIABLE COST

 A corporate expense that changes in proportion to production output.

 Example: Cost of raw materials and packaging.

BREAK – EVEN ANALYSIS
 BREAK EVEN POINT

 Is the point at which total cost and total revenue are equal, i.e. “even”.

 BREAK EVEN CHART

 It represents the graphs of fixed costs, variable costs, the expected

income, etc.
 Most convenient chart used in break even analysis.
BREAK – EVEN ANALYSIS
 VOLUME PROBLEM

 An item which can be sold for P63.00 per unit wholesale is being produced
with the following cost data:
BREAK – EVEN ANALYSIS
 What is the break even point sales volume and the break even sales
volume if one out of every 10 units produced is defective and is rejected
with only full recovery on materials.
 SOLUTION:
 Let x = number of units produced per month to break even
 Expenses:
BREAK – EVEN ANALYSIS
 TO BREAK EVEN:
BREAK – EVEN ANALYSIS
 If 1 out of 10 (10%) is defective and rejected:

 TO BREAK EVEN: Total income = total expenses

BREAK – EVEN ANALYSIS
 EXAMPLE 1:

 A market survey for a new gizmo indicates that the product can be sold at 40
dollars per unit. The fixed costs per period are 8430, and the variable selling
expense is 25 per unit. Production capacity per period is 850 units. Perform, a
break-even analysis and find (1) the equations for total revenue and total cost.
BREAK – EVEN ANALYSIS
 SOLUTION:

 A.

 Price is 40 per unit, So:

 (this tells us how to find TR at any quantity)

 Fixed Costs are given at 8430 and the variable cost per unit is 25, so:

 (this tells us how to find TC at any quantity)

BREAK – EVEN ANALYSIS
 EXAMPLE 2:

 A company which manufactures electric motors has a production

capacity of 200 motors a month. The variable costs are P 150.00
premotor. The average selling price of the motors is P 275.00. Fixed
costs of the company amount to P 20,000 per month which includes
taxes. Find the Number of Motors that must be sold each month to
break-even.
BREAK – EVEN ANALYSIS
 SOLUTION:

 Let x = number of motors to be sold each month to break-even

 Income - Expenses

 answer
BREAK – EVEN ANALYSIS
 EXAMPLE 3:

 The annual maintenance cost of a machine is P 70,000. if the cost of making

a forging is P 56 and its selling price id P 125 per forged unit, find the number
of units to be forged to break-even.
 SOLUTION :
 Letnumber of units to be forged to break-even
BREAK – EVEN ANALYSIS
 EXAMPLE 4:

 The Asian Transmission Co. makes and sells certain automotive parts.
Present sales volume is 500,000 units per year at a selling price of fifty
centavos (P0.50) per unit. Fixed expenses total P80,000.00 per year
 A. What is the present total profit for a year ?

 What is the present break-even point in pesos and in units ?

Solution :

A. Total Profit :

Income = P 250,000 Expenses = P80,000

BREAK – EVEN ANALYSIS
 Profit = Income – Expenses
 Profit = 250,000 – 80,000
 Profit = 170,000
B. Solving for Breakeven point
 Let x = number of units produced to breakeven
 Income = 0.5x
 Expenses = 80,000
 To break- even,
 Income – Expenses

 0.5 x = 80,000

 Thus, the company must produce 160,000 units to be sold at P 0.50 per
unit to break-even
BREAK – EVEN ANALYSIS
 EXAMPLE 5

A factory engaged in the fabrication of an automobile part with a production

capacity of 700,000 units per year is only operating at 62% of capacity due to
unavailability of the necessary foreign currency to finance the importation of their
raw materials. The annual income is P 430,000.00. Annual fixed cost are P
190,000.00 and variable costs are P 0.348 per unit.

A. What is the current profit or loss?

B. What is the break-even point?

BREAK – EVEN ANALYSIS
 SOLUTION :

A. Solving for the current profit or loss:

 Production = 0.62 (700,000)

 Production = 434,000

 Total expenses = 341,032

 Total income = 430,000

 Profit = 430,000 – 341032


BREAK – EVEN ANALYSIS
 Total income = 0.99 x
B. SOLVING FOR THE BREAK-EVEN
 TO BREAK-EVEN :
POINT  Income = Expenses
 Let number of units to break-even
 Expenses:
 Variable cost = 0.348x
 Fixed cost = 190,000
 Income :
BREAK – EVEN ANALYSIS
 EXAMPLE 6: A certain firm has the capacity to produce 650,000 units of
product per year. At present, its operating at 62% capacity. The firm’s annual
income is P4,160,000.00. Annual fixed cost are P1,920,000.00 and the
variable costs are equal to P 3.56 per unit of product. What is the firm’s
annual profit or loss and what volume of sales does the frim break-even?
 Solution:

 Solving for the firm’s annual profit or loss:

 Production = 0.62 (650,000)

 Production = 403,000
BREAK – EVEN ANALYSIS
 Total expenses = 1,920,000+3.56 (403,000)
 Total expenses = 3,354,680
 Total income = 4,169,000
 Profit = total income – total expenses
 Profit = 4,169,000 – 3,354,680
 Profit = 814,320
 Solving for the volume of sales for the firm to breakeven:
 In as much as the total expenses is P3,354,60, then the volume of sales
must be equal to this value in order to breakeven.
BREAK – EVEN ANALYSIS
 EXAMPLE 7: A small shop in Bulacan fabricates threshers for palay
producers in the locality. The shop can produce each thresher at a labor cost
of P1,800.00. the cost of materials for each unit is P2,500.00. the variable
costs amount to P650.00 per unit while fixed charges incurred per annum
totals P69,000.00. if the portable threshers are sold at P7,800.00 per unit, how
many units must be produced and sold per annum to breakeven?
 Solution:

 Let x = number of threshers produced and sold in 1 year

 Expenses:


BREAK – EVEN ANALYSIS
 Materials Cost = 2,500 x

 Variable cost = 650x

 Fixed charge = 69,000

 Total expenses = 1,800x+2,500x+650x+69,000

 Total expenses = 4,950 x+69,000

 Total income = 7,800x

 To breakeven : Total income = Total expenses


BREAK – EVEN ANALYSIS
 EXAMPLE 7: The direct labor cost and material cost of a certain product are
P300 and P400 per unit, respectively. Fixed charges are P100,000 per month
and other variable costs are P100 per unit. If the product is sold at P1,200 per
unit, how many units must be produced and sold to break even?
 SOLUTION :

 Let x = number of units produced per month to breakeven

 Expenses:

 Direct labor cost = 300x

BREAK – EVEN ANALYSIS
 Direct material cost = 400 x

 Variable cost = 100x

 Fixed charges = 100,000

 Total expenses = 300x+400x+100x+100,000

 Total expenses = 800x+100,000

 Total income = 1,200x

 To break-even: Total income = Total expenses

 1,200x= 800x+100,000

 400x = 100,000
THANK YOU!