Break-Even

Analysis
SEA – General Engineering Department
 Break-Even Analysis
Break-even analysis involves
the determination of the break-even
cost, which is the cost at which all
the methods will be equal.

Below this cost, one method will

be more economical, and above this
cost the other will prove to be the
better one economically.
 Break-Even Analysis
Break-even point is the level of
production where the total income is
equal to the total expenses, resulting
in no profit.

Below this break-even point, a

loss will result for the enterprise, and
above this, a profit will be realized.
 Break-Even Analysis
Break-even point is the value of the
variable for which the costs for the
alternatives will be equal.

𝑪𝟏 = 𝒇𝟏 (𝒙) and 𝑪𝟐 = 𝒇𝟐 (𝒙)

Where: 𝐶1 = certain specified total cost applicable to Alternative 1

𝐶2 = certain specified total cost applicable to Alternative 2
x = a common independent variable affecting Alternative 1
and Alternative 2
 Break-Even Analysis
Break-even chart is a graphical
representation of break-even
analysis.

Break-even point is the

intersection of the income line and
the total cost line on the break-even
chart.
Break-Even Chart
 Break-Even Analysis
Assumptions:
All units produced are sold at a constant
price per unit.
There is no income other than that from
operations.
The variable costs are directly
proportional to production rate from
zero to 100% capacity.
Fixed costs are constant regardless of
the number of units produced.
 Break-Even Analysis
𝑮𝑷 = 𝒏𝑺 − 𝒏𝑽 + 𝑭 = 𝒏 𝑺 − 𝑽 − 𝑭

Where: GP = annual gross profit

n = number of units produced
annually
S = net sales price per unit
V = variable cost per unit
F = annual fixed cost
 Break-Even Analysis
If the profits tax t is considered,

𝑵𝑷 = 𝑮𝑷 𝟏 − 𝒕

At break-even point, GP=0;

𝒏𝑽 + 𝑭 𝑭
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒖𝒏𝒊𝒕 𝒄𝒐𝒔𝒕 = =𝑽+
𝒏 𝒏
 Break-Even Analysis
′ ′ ′
𝑮𝑷 = 𝒏 + 𝒏 𝑺 − 𝒏𝑽 + 𝒏 𝑽 + 𝑭
′
𝑮𝑷 = 𝒏 𝑺 − 𝑽 + 𝒏′(𝑺 − 𝑽 ) − 𝑭

Where: n’ = number of units produced

above 100% capacity
V’ = variable cost per unit for
production in excess of 100%
capacity
 Break-Even Analysis
If the profits tax t is considered,

𝑵𝑷 = 𝑮𝑷 𝟏 − 𝒕

At break-even point, GP=0;

′
𝒏𝑽 + 𝒏 𝑽′ + 𝑭
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒖𝒏𝒊𝒕 𝒄𝒐𝒔𝒕 =
𝒏 + 𝒏′
 Break-Even Analysis
𝑮𝑷 = 𝒏𝑺 + 𝒏"𝑺′ − 𝒏𝑽 + 𝒏"𝑽 + 𝑭
𝑮𝑷 = 𝒏 𝑺 − 𝑽 + 𝒏"(𝑺′ − 𝑽) − 𝑭

Where: n = number of units sold

at price S
n” = number of units sold
at price S’
 Break-Even Analysis
If the profits tax t is considered,

𝑵𝑷 = 𝑮𝑷 𝟏 − 𝒕

At break-even point, GP=0;

𝒏𝑽 + 𝒏" 𝑽 + 𝑭 𝑭
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒖𝒏𝒊𝒕 𝒄𝒐𝒔𝒕 = =𝑽+
𝒏 + 𝒏" 𝒏 + 𝒏"
 Break-Even Analysis
A telephone switchboard cable can be
made up of either enameled wire or tinned
wire. There are 400 soldered connections.
The cost of soldering a connection on the
enameled wire will be P16.50; on the tinned
wire it will be P11.50. a cable made up with
enameled wire costs P56.00 per lineal
meter and made up with tinned wire P85.00
per lineal meter. Calculate the length of
cable used so that the cost of each
installation will be the same.
 Break-Even Analysis
𝐸𝑛𝑎𝑚𝑒𝑙𝑒𝑑 𝑤𝑖𝑟𝑒:
𝑃16.50 𝑃56
𝐶𝑜𝑠𝑡 = ∙ 400𝑐𝑜𝑛𝑛𝑒𝑐𝑡𝑖𝑜𝑛𝑠 + 𝑋
𝑐𝑜𝑛𝑛𝑒𝑐𝑡𝑖𝑜𝑛 𝑚
𝑪𝒐𝒔𝒕 = 𝟔, 𝟔𝟎𝟎 + 𝟓𝟔𝑿

𝑇𝑖𝑛𝑛𝑒𝑑 𝑤𝑖𝑟𝑒:
𝑃11.50 𝑃85
𝐶𝑜𝑠𝑡 = ∙ 400𝑐𝑜𝑛𝑛𝑒𝑐𝑡𝑖𝑜𝑛𝑠 + 𝑋
𝑐𝑜𝑛𝑛𝑒𝑐𝑡𝑖𝑜𝑛 𝑚
𝑪𝒐𝒔𝒕 = 𝟒, 𝟔𝟎𝟎 + 𝟖𝟓𝑿

6,600 + 56𝑋 = 4,600 + 85𝑋

85𝑋 − 56𝑋 = 6,600 − 4,600
6,600 − 4,600
𝑋= = 𝟔𝟖. 𝟗𝟕~𝟔𝟗 𝒎
85 − 56
 Break-Even Analysis
A firm has the capacity to
produce 1,000,000 units of a product
per year. At present, it is able to
produce and sell only 600,000 units
yearly at a total income of P720,000.
Annual fixed costs are P250,000 and
the variable costs per unit is P0.70.
 Break-Even Analysis
a. Calculate the firm’s annual profit or loss for
this production.
b. How many units should be sold annually to
break-even?
c. If the firm can increase its sales to 80% of
full capacity what will its profit or loss be,
assuming that its income and variable costs
per unit remain constant?
d. Draw a break-even chart indicating the
above results on the chart.
 Break-Even Analysis
𝑃0.70
𝐴. 𝐶𝑜𝑠𝑡 = 𝐹𝐶 + 𝑉𝐶 = 𝑃250,000 + ∙ 600,000𝑢𝑛𝑖𝑡𝑠
𝑢𝑛𝑖𝑡
𝐶𝑜𝑠𝑡 = 𝑃670,000
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐶𝑜𝑠𝑡 = 𝑃720,000 − 𝑃670,000
𝑷𝒓𝒐𝒇𝒊𝒕 = 𝑷𝒉𝒑 𝟓𝟎, 𝟎𝟎𝟎
𝑃720,000
𝐵. 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 = = 𝑃1.20/𝑢𝑛𝑖𝑡
600,000𝑢𝑛𝑖𝑡𝑠
𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐶𝑜𝑠𝑡
𝑃1.20 𝑃0.70
∙ 𝑋 𝑢𝑛𝑖𝑡𝑠 = 𝑃250,000 + ∙ 𝑋 𝑢𝑛𝑖𝑡𝑠
𝑢𝑛𝑖𝑡 𝑢𝑛𝑖𝑡
𝑃250,000
𝑋= = 𝟓𝟎𝟎, 𝟎𝟎𝟎 𝒖𝒏𝒊𝒕𝒔
𝑃1.20 − 𝑃0.70
𝑢𝑛𝑖𝑡
 Break-Even Analysis
𝐶. 𝑎𝑡 80% 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 (800,000 𝑢𝑛𝑖𝑡𝑠)
𝑃0.70
𝐶𝑜𝑠𝑡 = 𝐹𝐶 + 𝑉𝐶 = 𝑃250,000 + ∙ 800,000𝑢𝑛𝑖𝑡𝑠
𝑢𝑛𝑖𝑡
𝐶𝑜𝑠𝑡 = 𝑃810,000
𝑃1.20
𝐼𝑛𝑐𝑜𝑚𝑒 = ∙ 800,000𝑢𝑛𝑖𝑡𝑠 = 𝑃960,000
𝑢𝑛𝑖𝑡
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐶𝑜𝑠𝑡 = 𝑃960,000 − 𝑃810,000
𝑷𝒓𝒐𝒇𝒊𝒕 = 𝑷𝒉𝒑 𝟏𝟓𝟎, 𝟎𝟎𝟎
Break-Even Analysis
 Break-Even Analysis
A company employ salesmen to sell its
products. If a salesman uses his car, the company
will pay him P9.50 per kilometer for the use of his
car. However, for cars furnished by the company,
the following data apply: first cost of car P400,000,
life of car 4 years, trade-in value at the end of 4
years P50,000, car insurance per year P12,500,
storage cost of car P500 a month, cost of fuel, oil
tires, and maintenance P4.25 per kilometer. If
money is worth 12% to the company, determine
the number of kilometers each salesman must
travel in one year for the two methods of providing
transportation to break even.
 Break-Even Analysis
𝑆𝑎𝑙𝑒𝑠𝑚𝑎𝑛 𝐶𝑎𝑟:
𝑃9.50
𝐶𝑜𝑠𝑡 = ∙ 𝑋 𝑘𝑚 = 𝑷𝟗. 𝟓𝟎𝑿
𝑘𝑚

𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝐶𝑎𝑟:
𝐶𝑜𝑠𝑡 = 𝐷𝑒𝑝 + 𝐼𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 + 𝑆𝑡𝑜𝑟𝑎𝑔𝑒 + 𝑀𝑅𝑃 + 𝑀𝐶
𝑃400,000 − 𝑃50,000 𝑃500
𝐶𝑜𝑠𝑡 = 0.12 + 𝑃12,500 + ∙ 12𝑚𝑜𝑠
1 + 0.12 4 − 1 𝑚𝑜
𝑃4.25
+0.12 𝑃400,000 + ∙ 𝑋 𝑘𝑚
𝑘𝑚
𝐶𝑜𝑠𝑡 = 𝑃139,732.0527 + 𝑃4.25𝑋

𝑃139,732.0527 + 𝑃4.25𝑋 = 𝑃9.50𝑋

139,732.0527
𝑋= = 𝟐𝟔, 𝟔𝟏𝟓. 𝟔𝟑~𝟐𝟔, 𝟔𝟏𝟔 𝒌𝒎
9.50 − 4.25
 Break-Even Analysis
The cost of producing a small
transistor radio set consists of P23.00
for labor and P37.00 for materials. The
fixed charges in operating the plant are
P100,000 per month. The variable cost
is P1.00 per set. The radio set can be
sold for P75.00 each. Determine how
many sets must be produced per
month to break-even.
 Break-Even Analysis
𝐶𝑜𝑠𝑡 = 𝐿𝐶 + 𝑀𝐶 + 𝐹𝐶 + 𝑉𝐶
𝑃23 𝑃37 𝑃1
𝐶𝑜𝑠𝑡 = ∙ 𝑋 𝑠𝑒𝑡𝑠 + ∙ 𝑋 𝑠𝑒𝑡𝑠 + 𝑃100,000 + ∙ 𝑋 𝑠𝑒𝑡𝑠
𝑠𝑒𝑡 𝑠𝑒𝑡 𝑠𝑒𝑡
𝐶𝑜𝑠𝑡 = 𝑷𝟔𝟏𝑿 + 𝑷𝟏𝟎𝟎, 𝟎𝟎𝟎
𝑃75
𝐼𝑛𝑐𝑜𝑚𝑒 = ∙ 𝑋 𝑠𝑒𝑡𝑠 = 𝑷𝟕𝟓𝑿
𝑠𝑒𝑡
𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐶𝑜𝑠𝑡
75𝑋 = 61𝑋 + 100,000
100,000
𝑋= = 𝟕, 𝟏𝟒𝟐. 𝟖𝟔~𝟕, 𝟏𝟒𝟑 𝒔𝒆𝒕𝒔
75 − 61
 Break-Even Analysis
A small shop in Bulacan fabricates
portable threshers for palay producers in the
locality. The shop can produce each
thresher at a labor cost of P1,800. The cost
of materials for each unit is P2,500. The
variable costs amount to P650 per unit,
while fixed charges incurred per annum
totals P69,000. If the portable threshers are
sold at P7,800 per unit, how many units
must be produced and sold per annum to
break-even?
 Break-Even Analysis
𝐶𝑜𝑠𝑡 = 𝐿𝐶 + 𝑀𝐶 + 𝐹𝐶 + 𝑉𝐶
𝑃1,800 𝑃2,500
𝐶𝑜𝑠𝑡 = ∙ 𝑋 𝑡ℎ𝑟𝑒𝑠ℎ𝑒𝑟𝑠 + ∙ 𝑋 𝑡ℎ𝑟𝑒𝑠ℎ𝑒𝑟𝑠
𝑡ℎ𝑟𝑒𝑠ℎ𝑒𝑟 𝑡ℎ𝑟𝑒𝑠ℎ𝑒𝑟
𝑃650
+𝑃69,000 + ∙ 𝑋 𝑡ℎ𝑟𝑒𝑠ℎ𝑒𝑟𝑠
𝑡ℎ𝑟𝑒𝑠ℎ𝑒𝑟
𝐶𝑜𝑠𝑡 = 𝑷𝟒, 𝟗𝟓𝟎𝑿 + 𝑷𝟔𝟗, 𝟎𝟎𝟎
𝑃7,800
𝐼𝑛𝑐𝑜𝑚𝑒 = ∙ 𝑋 𝑡ℎ𝑟𝑒𝑠ℎ𝑒𝑟𝑠 = 𝑷𝟕, 𝟖𝟎𝟎𝑿
𝑡ℎ𝑟𝑒𝑠ℎ𝑒𝑟
𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐶𝑜𝑠𝑡
7,800𝑋 = 4,950𝑋 + 69,000
69,000
𝑋= = 𝟐𝟒. 𝟐𝟏~𝟐𝟓 𝒕𝒉𝒓𝒆𝒔𝒉𝒆𝒓𝒔
7,800 − 4,950
 Break-Even Analysis
A company has production capacity
of 500 units per month and its fixed costs
are P250,000 a month. The variable
costs per unit is P1,150 and each unit
can be sold for P2,000. Economy
measures are instituted to reduce the
fixed costs by 10% and the variable costs
by 20%. Determine the old and new
break even points. What are the old and
new profit at 100% capacity?
 Break-Even Analysis
𝑂𝑙𝑑
𝐶𝑜𝑠𝑡 = 𝐹𝐶 + 𝑉𝐶
𝑃1,150
𝐶𝑜𝑠𝑡 = 𝑃250,000 + ∙ 𝑋 𝑢𝑛𝑖𝑡𝑠
𝑢𝑛𝑖𝑡
𝐶𝑜𝑠𝑡 = 𝑷𝟏, 𝟏𝟓𝟎𝑿 + 𝑷𝟐𝟓𝟎, 𝟎𝟎𝟎
𝑃2,000
𝐼𝑛𝑐𝑜𝑚𝑒 = ∙ 𝑋 𝑢𝑛𝑖𝑡𝑠 = 𝑷𝟐, 𝟎𝟎𝟎𝑿
𝑢𝑛𝑖𝑡
𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐶𝑜𝑠𝑡
2,000𝑋 = 1,150𝑋 + 250,00
250,000
𝑋= = 𝟐𝟗𝟒. 𝟏𝟐~𝟐𝟗𝟓 𝒖𝒏𝒊𝒕𝒔
2,000 − 1,150
 Break-Even Analysis
𝑁𝑒𝑤:
𝐶𝑜𝑠𝑡 = 𝐹𝐶 + 𝑉𝐶
𝑃1,150
𝐶𝑜𝑠𝑡 = (0.90)𝑃250,000 + (0.80) ∙ 𝑋 𝑢𝑛𝑖𝑡𝑠
𝑢𝑛𝑖𝑡
𝐶𝑜𝑠𝑡 = 𝑷𝟗𝟐𝟎𝑿 + 𝑷𝟐𝟐𝟓, 𝟎𝟎𝟎
𝑃2,000
𝐼𝑛𝑐𝑜𝑚𝑒 = ∙ 𝑋 𝑢𝑛𝑖𝑡𝑠 = 𝑷𝟐, 𝟎𝟎𝟎𝑿
𝑢𝑛𝑖𝑡
𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐶𝑜𝑠𝑡
2,000𝑋 = 920𝑋 + 225,00
225,000
𝑋= = 𝟐𝟎𝟖. 𝟑𝟑~𝟐𝟎𝟗 𝒖𝒏𝒊𝒕𝒔
2,000 − 920
 Break-Even Analysis
𝑂𝑙𝑑:
𝑃1,150
𝐶𝑜𝑠𝑡 = 𝐹𝐶 + 𝑉𝐶 = 𝑃250,000 + ∙ 500 𝑢𝑛𝑖𝑡𝑠 = 𝑷𝟖𝟐𝟓, 𝟎𝟎𝟎
𝑢𝑛𝑖𝑡
𝑃2,000
𝐼𝑛𝑐𝑜𝑚𝑒 = ∙ 500 𝑢𝑛𝑖𝑡𝑠 = 𝑷𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎
𝑢𝑛𝑖𝑡
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑃1,000,000 − 𝑃825,000 = 𝑷𝒉𝒑 𝟏𝟕𝟓, 𝟎𝟎𝟎

𝑁𝑒𝑤:
𝑃1,150
𝐶𝑜𝑠𝑡 = (0.90)𝑃250,000 + (0.80) ∙ 500 𝑢𝑛𝑖𝑡𝑠 = 𝑷𝟔𝟖𝟓, 𝟎𝟎𝟎
𝑢𝑛𝑖𝑡
𝑃2,000
𝐼𝑛𝑐𝑜𝑚𝑒 = ∙ 500 𝑢𝑛𝑖𝑡𝑠 = 𝑷𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎
𝑢𝑛𝑖𝑡
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑃1,000,000 − 𝑃685,000 = 𝑷𝒉𝒑 𝟑𝟏𝟓, 𝟎𝟎𝟎
 Break-Even Analysis
Compute for the number of blocks that an ice
plant must be able to sell per month to break-
even based on the following data:

Cost of electricity per block P20

Tax to be paid per block 2
Real estate tax 3,500/month
Salaries and wages 25,000/month
Others 12,000/month
Selling price of ice 55/block
 Break-Even Analysis
𝐶𝑜𝑠𝑡 = 𝐸𝐶 + 𝑇𝑎𝑥 + 𝑅𝐸𝑇 + 𝑊𝑎𝑔𝑒 + 𝑂𝐶
𝑃20 𝑃2
𝐶𝑜𝑠𝑡 = ∙ 𝑋 𝑏𝑙𝑜𝑐𝑘𝑠 + ∙ 𝑋 𝑏𝑙𝑜𝑐𝑘𝑠 + 𝑃3,500
𝑏𝑙𝑜𝑐𝑘 𝑏𝑙𝑜𝑐𝑘
+𝑃25,000 + 𝑃12,000
𝐶𝑜𝑠𝑡 = 𝑷𝟐𝟐𝑿 + 𝑷𝟒𝟎, 𝟓𝟎𝟎
𝑃55
𝐼𝑛𝑐𝑜𝑚𝑒 = ∙ 𝑋 𝑏𝑙𝑜𝑐𝑘𝑠 = 𝑷𝟓𝟓𝑿
𝑏𝑙𝑜𝑐𝑘
𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐶𝑜𝑠𝑡
55𝑋 = 22𝑋 + 40,500
40,500
𝑋= = 𝟏, 𝟐𝟐𝟕. 𝟐𝟕~𝟏, 𝟐𝟐𝟖 𝒃𝒍𝒐𝒄𝒌𝒔
55 − 22
 Break-Even Analysis
A shoe manufacturer produces a
pair of shoes at a labor cost of P8.50 and
materials cost of P23.50. The fixed
charges on the business are P10,125 a
month and the variable costs are P2.50 a
pair. If the shoes sell to retailers for
P48.00 a pair, how many pairs must be
produced and sold each month for the
manufacturer to break even?
 Break-Even Analysis
𝐶𝑜𝑠𝑡 = 𝐿𝐶 + 𝑀𝐶 + 𝐹𝐶 + 𝑉𝐶
𝑃8.50 𝑃23.50
𝐶𝑜𝑠𝑡 = ∙ 𝑋 𝑝𝑎𝑖𝑟𝑠 + ∙ 𝑋 𝑝𝑎𝑖𝑟𝑠
𝑝𝑎𝑖𝑟 𝑝𝑎𝑖𝑟
𝑃2.50
+𝑃10,125 + ∙ 𝑋 𝑝𝑎𝑖𝑟𝑠
𝑝𝑎𝑖𝑟
𝐶𝑜𝑠𝑡 = 𝑷𝟑𝟒. 𝟓𝟎𝑿 + 𝑷𝟏𝟎, 𝟏𝟐𝟓
𝑃48
𝐼𝑛𝑐𝑜𝑚𝑒 = ∙ 𝑋 𝑝𝑎𝑖𝑟𝑠 = 𝑷𝟒𝟖𝑿
𝑝𝑎𝑖𝑟

𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐶𝑜𝑠𝑡
48𝑋 = 34.50𝑋 + 10,125
10,125
𝑋= = 𝟕𝟓𝟎 𝒑𝒂𝒊𝒓𝒔
48 − 34.50
 References
Blank, L. & Tarquin, A. (2018). Engineering
Economy (8th Ed.). McGraw-Hill Education.
Sullivan, W., Wicks, E. & Koelling, C. P. (2014).
Engineering Economy (16th Ed.). Pearson
Education South Asia Pte Ltd.
Sta. Maria, H. (2000). Engineering Economy
(3rd Ed.). National Book Store.
Arreola, M. (1993). Engineering Economy
(3rd Ed.). Ken Incorporated.