MANAGERIAL ECONOMICS

Final Term

The Break-even Analysis

 Aims for today
To understand
what Break-even is
and how it can be
used to assist
businesses in their
planning
 What does Break-even mean?
• Break even is where a firms TOTAL REVENUE is
the same as its TOTAL COSTS

(In other words, money coming in = money going out).

• At the break even point, a firm is neither making a

PROFIT nor a LOSS

Q: Why would it be useful for a manufacturing

business to calculate its break even point?
To understand the role & purpose of break
even analysis
 Break-even
• Break even analysis is useful as a business can
work out what volume of sales it needs to
achieve to cover its costs.

• The key to break even is to work out the

contribution made from the sale of each unit.

• The amount of money from each unit sold

contributes to pay for the fixed and indirect
costs of the business.
Starter task: Formula booster
 BREAK EVEN POINT
To calculate the break-even point in units, use the formula:
Break-Even Point (units) = Fixed Costs ÷ (Sales price per unit –
Variable costs per unit) or in sales denominations using the formula:
Break-Even point (sales dollars) = Fixed Costs ÷ Contribution Margin.
 Contribution Margin Formula
How Do You Calculate the Contribution Margin?
The contribution margin is calculated as Revenue - Variable Costs.
The contribution margin ratio is calculated as
(Revenue - Variable Costs) / Revenue.
 Break even formula

Contribution

FOR EXAMPLE: BREAK-EVEN POINT

Fixed Costs P39,000.00 = ________
Variable Cost P12.00
Selling Price P18.00

To understand the role & purpose of break

even analysis
 Break even formula

Contribution

FOR EXAMPLE: BREAK-EVEN POINT

Fixed Costs P39,000.00 = 6,500 Units
Variable Cost P12.00
Selling Price P18.00

To understand the role & purpose of break

even analysis
 Contribution formula
Contribution = Selling Price less Variable Costs per unit
(SP - VC)

• Cans of coke = P1 - 0.25 = 0.75 contribution

• Fixed costs are P6,000

• BE = FC / Contribution

• P6,000 / P0.75 = 8000 Cans need to be sold to break even

 A CP factory has the following costs:
• Fixed cost: P10,000
• Variable cost: P2.00
• Selling price: P7.00

Q: Calculate the break even point in units and

the break-even point in revenue.
 A CP factory has the following costs:
• Fixed cost: P10,000
• Variable cost: P2.00
• Selling price: P7.00

Q: Calculate the break even point in units and the

break point in revenue.

ANSWER: In units P10,000 / (P7-2) = 2000 units

In revenue: P2,000 x P7 = P14,000
Break even point in units =

Fixed costs / Contribution

P10,000 / (P7.00-P2.00)
= 2000 units
Break even point in revenue

Quantity at Break-even
x
Selling price

P2,000 x P7 = P14,00
 Calculating the break even point
Step 1.
Identify fixed & variable costs; add them together to get the
TOTAL costs

Step 2.
Calculate the TOTAL REVENUE

To understand the role & purpose of break

even analysis
 Match the formulas
1. Contribution A. Selling price x Quantity

2. Break Even in units B. Actual production level –

break-even output

3. Margin of safety C. Total revenue – Total costs

4. Total Revenue
D. Fixed costs/contribution
5. Profit or loss?

E. Selling Price – Variable costs

Long Run Cost Analysis
Long Run Cost Analysis
Long Run Marginal Cost
Profit Analysis
Break Even Condition
Break Even Condition
Net Loss Condition
Total Revenue and Total Cost
 Task 1: Calculating Break Even

• Use the following

information to
complete the table:
FC = P2,000.00
VC = P2.00
Selling Price = P4.00
To understand the role & purpose of break
even analysis
 Calculating the break even point
Step 1.
Identify fixed & variable costs – add them together to get the
TOTAL costs

Step 2.
Calculate the TOTAL REVENUE

To understand the role & purpose of break

even analysis
OUTPUT FC VC TC TR (SP=£4) Profit

0 2000 0 2000 0 -2000

200 2000 400 TASK24002: 800 -1600

400 2000 800 2800 1600 -1200

600 2000
BREAK-EVEN
1200 3200
POINTS
2400 -800

800 2000 1600 3600 3200 -400

CHART APPLICATION
1000 2000 2000 4000 4000 0

1200 2000 2400 4400 4800 400

1400 2000 2800 4800 5600 800

1600 2000 3200 5200 6400 1200

1800 2000 3600 5600 7200 1600

2000 2000 4000 6000 8000 2000

To understand the role & purpose of break
even analysis
Task 1: Calculating Break Even
• Use the following
information to
complete the table:
FC = P2,000.00
VC = P2.00
Selling Price = P4.00

To understand the role & purpose of break

even analysis
 Task 2: Draw the Break-even Chart
using your data
1. Label the vertical axis “sales and costs in Peso”.
2. Label the horizontal axis “sales/production (units)”.
3. Draw on the BE point
4. Draw a horizontal line for total fixed costs.
5. Starting at the Total Variable costs point, draw the total cost line
going through the break even point.
6. Starting at zero, draw the total revenue line through the break
even.
7. Where the sales revenue crosses the total costs line is the break
even point.
8. Read off the units of sales to give the break even level of sales.
9. The gap between the total costs line and sales revenue line after
the break even point represents the level of profit.

To understand the role & purpose of break

even analysis
 The Break-Even Chart
(Php
(Php)
(Php)

To understand the role & purpose of break

even analysis
 Margin of Safety Formula
• The difference between the planned number of
of units
units or or actual
actual sales
sales andand
thethe number
number of of
units of
units of break
sales at sales at break
even even point.
point.

Cans of coke: They can make:

Cans of coke: They can make:
• 1,200 to 1,800 cans potentially – 1,000 actual units at
• 10,000
break evencans potentially – 8,000 actual units at break
even
• = 200 Margin of safety
• = 2,000 Margin of safety
 Task 3: Draw the Margin of safety
(Php)

To understand the role & purpose of break

even analysis
 Task 3: Draw the Margin of safety
(Php
(Php)

To understand the role & purpose of break

even analysis
 Extension task:
Break even worksheet
Complete worksheets:

#3 Break-even Analysis
#4 Break-even charts

To understand the role & purpose of break

even analysis
Why must businesses understand its
break even point?
Write your answer here
Limitations of Break-even Charts?
Write your answer here
 Task 4 Hot Dogs
• Helen & Joe operate a hot
dog stand in the town
centre. The stand costs P200
per week to hire. Each hot
dog needs one bread roll at
20centavo, one sausage at
25centavo and sauces at
5centavo.

• The selling price of each hot

dog is P1.00
 Complete the table
At what quantity do total costs = total revenue? (Break even)
What profit is made when they sell 600 hot dogs?

QUANTITY FIXED VARIABLE TOTAL TOTAL PROFIT OR

COSTS COSTS COSTS REVENUE LOSS?
100
150
200
250
300
350
400
450
500
550
600
650
 Complete the table
At what quantity do total costs = total revenue? (Break even)
What profit is made when they sell 600 hot dogs?
QUANTITY FIXED COSTS VARIABLE TOTAL TOTAL PROFIT OR
QUANTITY FIXED COSTS
VARIABLE COSTS
TOTAL REVENUE
TOTAL LOSS?OR
PROFIT
100 COSTS COSTS COSTS REVENUE LOSS?
100 200 50 250 100 -150
150
150 200 75 275 150 -125
200
200 200 100 300 200 -100
250
250 200 125 325 250 -75
300
300 200 150 350 300 -50
350
350 200 175 375 350 -25
400
400 200 200 400 400 0
450
450 200 225 425 450 25
500
500 200 250 450 500 50
550
550 200 275 475 550 75
600
600 200 300 500 600 100
650
650 200 325 525 650 125
 Task 5
1. Draw a Break Even chart for the Hot Dog
business - Ensure your chart is FULLY and CLEARLY labelled
2. Draw on the margin of safety (1)
3. Explain how the Break even analysis will help
Helen and Joe (4)
4. Discuss what strategies Helen and Joe could use
to enable them to reach their break even point
quicker (6)
5. Evaluate which of these strategies would be best
for the business (6)
 Plenary 1: Break-even drag & drop

• http://www.businessstudiesonline.co.uk/AppliedGcseBusiness/Activities/Unit3/BreakEven/Br
eakEvenTermsDragDrop/frame.html
To understand the role & purpose of break
even analysis
Break even drag & drop solution

To understand the role & purpose of break

even analysis
Plenary 2: Break-even piggy bank

http://www.quia.com/cz/5773.html?AP_rand=331777296
To understand the role & purpose of break
even analysis
Plenary 3: Formula Recap
 Contribution

Selling Price – Variable costs

To understand the role & purpose of break

even analysis
 Break Even in units

Fixed costs/contribution

To understand the role & purpose of break

even analysis
Break Even Revenue

Break Even Quantity x

Selling price

To understand the role & purpose of break

even analysis
 Margin of safety

Actual production level –

break even output

To understand the role & purpose of break

even analysis
 Total Revenue

Selling price x Quantity

To understand the role & purpose of break

even analysis
 Total Revenue

Selling price x Quantity

To understand the role & purpose of break

even analysis
 Profit or loss?

Total Revenue – Total Costs

To understand the role & purpose of break

even analysis
 Match the formulas
1. Contribution A. Selling price x Quantity

2. Break Even in units B. Actual production level –

break-even output

3. Margin of safety C. Total revenue – Total costs

4. Total Revenue
D. Fixed costs/contribution
5. Profit or loss?

E. Selling Price – Variable costs

Thank you!

Prof. Dexter N. Magno, MBA, LPT