B.

E Analysis
Dr. Raza Ali Khan
 Breakeven Point

• a
Value of a parameter that makes two elements equal

The parameter (or variable) can be an amount of

revenue, cost, supply, demand, etc. for one project
or between two alternatives
 Cost-Revenue Model ― One Project
Quantity, Q — An amount of the variable in
question, e.g., units/year, hours/month
Breakeven value is QBE

Fixed cost, FC — Costs not directly dependent on the variable, e.g.,

buildings, fixed overhead, insurance, minimum workforce cost
Variable cost, VC — Costs that change with parameters such as
production level and workforce size. These are labor, material
and marketing costs. Variable cost per unit is v
Total cost, TC — Sum of fixed and variable costs, TC = FC + VC

Revenue, R — Amount is Profit, Prof — Amount of

dependent on quantity sold revenue remaining after costs
Revenue per unit is P Prof = R – TC = R – (FC+VC)
© 2012 by McGraw-Hill All Rights Reserved
13-4
 Breakeven for linear R and TC

Set R = TC and solve for Q = QBE

R = TC
PQ = FC + vQ

FC
QBE =
P–v

When variable cost, v, is

lowered, QBE decreases
(moves to left)

13-5 © 2012 by McGraw-Hill All Rights Reserved

 Example: One Project Breakeven Point

A plant produces 15,000 units/month. Find breakeven level if FC =

$75,000 /month, revenue is $8/unit and variable cost is $2.50/unit.
Determine expected monthly profit or loss.

Solution: Find QBE and compare to 15,000; calculate Profit

QBE = 75,000 / (8.00-2.50) = 13,636 units/month

Production level is above breakeven Profit

Profit = R – (FC + VC)
= PQ – (FC + vQ) = (P-v)Q – FC
= (8.00 – 2.50)(15,000) – 75,000
= $ 7500/month

13-6 © 2012 by McGraw-Hill All Rights Reserved

 Problem
• A product currently sells for $12 per unit. The
variable costs are $4 per unit, and 10,000
units are sold annually and a profit of $30,000
is realized per year. A new design will increase
the variable costs by %20 and Fixed Costs by
%10 but sales will increase to 12,000 units per
year. (a) At what selling price do we break
even, and (b) If the selling price is to be kept
same ($12/unit) what will the annual profit
be? © 2012 by McGraw-Hill All Rights
6
Reserved
 Solution
• Profit = revenue – costs
• 30000 = 10000(12) – [10000(4) + FC] FC =
fixed costs
• FC = 50000
• (a) New variable cost = $4(1.2) = $4.8 per unit.
• New fixed costs = 50000(1.1) = $55000
• Let x = breakeven selling price per unit, then
• 12000x = 55000 + 12000(4.8)
• or, x = $9.38/unit
• (b) Profit = 12000(12) – 12000(4.8) - 55000
© 2012 by McGraw-Hill All Rights
• = $31400 Reserved
7
 Problem
• A defense contractor has been able to summarize
its total annual fixed costs as $100,000 and the total
variable cost per unit of production as $33. (a) If
only 5000 units is all that is expected to sell to the
government this year what should the per unit
selling price be to make a %25 profit this year? (b) If
foreign sales of 3000 units per year is to be added
to the 5000 units government contract above and a
%25 profit is acceptable for this contractor again,
what could be the new selling price per unit?
© 2012 by McGraw-Hill All Rights
8
Reserved
 Solution
• Total costs = 100000 + 5000(33) = 265000
• % profit = 100(revenue – cost)/cost
• 25 = 100(revenue – 265000)/265000 or, revenue =
265000(1.25) = 331250
• Selling price = 331250/5000 = $66.25 / unit.
• b) Total cost = 100000 + 8000(33) = 364000
Revenue for 25% profit = 364000(1.25) = 455000
• New selling price = 455000/8000 = $56.875 per
unit.
© 2012 by McGraw-Hill All Rights
9
Reserved
 Problem
• A company produces an electronic timing switch
that is used in consumer and commercial
products made by several other manufacturing
firms. The fixed cost is $73,000 per month and
the variable cost is $83 per unit. The selling price
per unit is $180-0.02Q. For this situation
(a) Determine the optimal volume for this product
and confirm that a profit occurs at this quantity
(b) Find the volume at which breakeven occurs.
 Problem
• An engineering consulting firm measures its
output in a standard service hour unit, which is a
function of the personal grade levels in the
professional staff. The variable cost is $62 per
standard service hour. The charge-out rate lie,
selling price is $85 per hour. The maximum
output of the firm is 160,000 hours per year and
its fixed cost is $2,024,000 per year. For this firm
(a) what is the BEP in standard service hours and
in percentage of total capacity and (b) what is the
percentage reduction in the BEP if fixed costs are
reduced 10%; if variable cost / hour is reduced
10%, if both costs are reduced 10%; and if the
selling price is increased by 10%?