BREAK EVEN ANALYSIS

A. BREAK-EVEN POINT - the point where sales or revenues equal expenses.

-no profit is made or loss incurred at the break-even point

B. B. BREAK-EVEN MARGIN -a ratio that shows the gross-margin factor for a break-even condition.

-the formula is total expenses divided by net revenues multiplied by

100% to get a percentage.

C. WAYS TO LOWER BREAK-EVEN

1. Lower direct costs, which will raise the gross margin

2. exercise cost controls on your fixed expense, and lower the necessary total dollars

3. raise prices

D. KEY BREAK-EVEN FACTORS

a. fixed costs -these costs remain constant ( or nearly so) within the projected range of sales

- includes facilities costs, certain general and administrative costs, and interest and
depreciation expense

b. variable cost - vary in proportion to sales levels

-include direct material and labor costs, the variable part of manufacturing, overhead,
and transportation and sales commission expenses.

c. contribution margin - equal to sales revenues less variable costs

-available to offset fixed expenses and produce an operating profit for business.

E. CALCULATING THE BREAK-EVEN POINT

At break-even;

TOTAL INCOME = TOTAL COST

Let x = the number of units at break-even

X(selling price per unit)= Total Fixed cost+ (Variable Cost/ unit)(x)

To solve for profit/ loss:

TOTAL INCOME =Total Fixed Cost + Total Variable Cost + dividend(%share)(#of shares) + Profit/Loss

Problems:

1. Steel drum manufacturers incur a yearly fixed operating cost of P200,000. Each drum
manufactured cost of P160 to produce and sells P200. What is the manufacturer’s break-even
sales volume in drums per year?

2. A local factory assembling calculators produces 400 units per month and sells them at P 1,800
each. Dividends are 8% on the 8,000 shares with par value of P250 each. the fixed operating cost
per month is P25,000. other costs are P1,000 per unit. determine the break-even point. if only
200 units were produced per month, determine the profit or loss
ans: 32 units. b. P121, 667 per month

3. A factory engaged in the fabrication of an automobile part with a production capacity of 700,
units per year is operating only at 62% of capacity due to unavailability of the necessary foreign
currency to finance the importation of their raw materials. The annual income is P430,000,
annual fixed costs are P190,000, and variable cost are P0.348 per unit.
a. What is the profit/loss ?
b. What is the break even point?

4. A plant produces 300 units of equipment a month of P3,600 each. A unit sells for P4,800. The
company has 10,000 shares of stock at P200 par value whose annual divided is 20%. The fixed
cost of production of P120,000 a month.
a. What is the break even point?
b. What is the profit/loss if production is 60% capacity