### Break-Even Analysis

• Identify fixed and variable costs;

• Perform break-even analysis to calculate break-even quantity.

• Calculate required quantity to be manufactured to obtain certain profit (or to limit loss).

### Solved Example:

#### 17-3-01

Before break-even point, a company will have:

Solution:
Break-even point gives you minimum quantity to be manufactured so that the company will start earning profit. This means after break-even point, the company will have profit. Before that company will experience a loss.

### Solved Example:

#### 17-3-02

The breakeven point is obtained at intersection of:

Solution:
Refer the above figure. At break-even quantity, there is no profit or no loss, which means revenues are equal to total cost. Hence, break even point is at the intersection of total revenue and total cost.

### Solved Example:

#### 17-3-03

At breakeven point:

Solution:
At break-even quantity, there is no profit or no loss, which means revenues are equal to total cost.

### Solved Example:

#### 17-3-04

Break-even analysis requires costs to be categorized as:

Solution:

Depending upon whether the costs vary based upon quantity, the costs can be divided into two categories, fixed and variable.
Fixed cost (FC): It is a cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses that have to be paid by a company, independent of any business activity. For example:

1. Initial investment made by the company in making plant and building, purchasing machinery and equipment etc. Rent. This is a periodic charge for the use of real estate owned by a landlord.

2. Salaries. This is a fixed compensation amount paid to employees, irrespective of their hours worked.

3. Utilities. This is the cost of electricity, gas, phones, and so forth. This cost has a variable element, but is largely fixed.

Variable Cost (VC): Variable cost line has a positive or upward slop starting from origin that indicates the effect of increasing variable expenses with the increase in production.
Variable costs are those that respond directly and proportionately to changes in product produced. For example:

1. Direct raw materials. The most purely variable cost of all, are the raw materials that go into a product.

2. Piece rate labor. This is the amount paid to workers for every unit completed.

3. Production supplies. Things like machinery oil are consumed based on the amount of machinery usage, so these costs vary with production volume.

4. Shipping cost: A business incurs a shipping cost only when it sells and ships out a product. Thus, freight out can be considered a variable cost.

### Solved Example:

#### 17-3-05

In break-even analysis, if fixed costs are increased, then:

Solution:
If fixed costs are increased, then total costs will also increase. Hence the intersection point between total costs and sales revenue will also shift towards right.

### Solved Example:

#### 17-3-06

In a graph of break even analysis, revenues are represented by:

Solution:

In a graph of break-even analysis,

• Fixed costs are represented by a horizontal straight line with y-intercept equal to fixed costs.

• Variable costs are represented by an inclined straight line passing through origin.

• Total costs are represented by an inclined straight line having same slope as variable cost line but with a y-intercept equal to fixed costs.

• Sales revenues are represented by an inclined straight line passing through origin, but its slope is more than slope of variable cost line.

### Solved Example:

#### 17-3-07

The quantity required to have desired profit is:

Solution:
The required quantity should be able to recover fixed cost AND be able to give you profit, so it is total of both. Since each unit gives you contribution (net profit = sales price - variable cost), the required quantity will be ratio of them.

### Solved Example:

#### 17-3-10

Consider the following data projected for the year:

• Selling price/unit: $14 • Variable Cost/unit:$5 (this was for labor, materials and overhead required)

• Fixed Costs: $100,000/year (rent, insurance, and other costs that do not depend on volume) • Projected volume: 70,000 units (sales based on previous year sales) Calculate the break-even volume using the data above. Solution: BEP =$\dfrac{100000}{14-5}= 11,111\$

### Solved Example:

#### 17-3-11

A graphical device used to determine the break-even point and profit potential under varying conditions of output and costs, is known as:

Solution:

Let us look at the options individually.

• A Gantt chart is a type of bar chart, that illustrates a project schedule. Gantt charts illustrate the start and finish dates of the terminal elements and summary elements of a project.

• A flow chart is a graphical representation of a computer program in relation to its sequence of functions (as distinct from the data it processes).

• A break-even chart calculated the break-even point, that is the point at which revenue is exactly equal to costs. At this point, no profit is made and no losses are incurred.

• PERT:(Program Evaluation and Review Technique) A Project Management technique is a means of projecting task and project completion and organizing complex sequences of tasks. PERT is based on the probability of an event occurring at a specified time.

### Solved Example:

#### 17-3-12

Break-even analysis consists of:

Solution:
Break-even analysis consists of fixed cost, which do not change with quantity manufactured, such as cost of land, machinery, license and registration, etc, as well as variable cost, which are directly proportional to the quantity manufactured, such as raw material cost and utility costs.

### Solved Example:

#### 17-3-13

Break-even analysis shows profit when:

Solution:
Break-even analysis shows profit after break even point, when sales exceed total costs.