3rd-PPTECON123

College of Engineering

• Institution: Manuel S. Enverga University Foundation, Lucena City

• Course: Engineering Economy (ECON123)

• Lecture Type: Synchronous Lecture

Break-Even Analysis

• Definition: The point where revenue equals cost, resulting in zero profit or loss.

  • Profit Calculation:

    • Profit = Revenue - Cost

    • Profit = + (gain), - (loss), 0 (break-even)

Costs in Break-Even Analysis

Variable Costs

• Costs that change with the quantity of production.

• Examples:

  1. Direct material cost

  2. Direct labor cost

  3. Cost of miscellaneous supplies

  4. Payroll benefits costs

  5. Income taxes

  6. Supervision costs

  7. Electric costs

Fixed Costs

• Costs that remain constant regardless of production level.

• Examples:

  1. Rent

  2. Property taxes

  3. Interest on loans

  4. Insurance

  5. Janitorial service expense

  6. Tooling expense

  7. Set-up, clean-up, and tear-down expense

  8. Depreciation expense

  9. Marketing and selling costs

  10. Cost of utilities

  11. General burden and overhead expense

Cost Formula

• Cost Equation:

  Cost = Variable Cost (VC) + Fixed Cost (FC)

Break-Even Formula

• Break-Even Point Calculation:

  To break-even:

  • nS = FC + nVC

  • Where:

    • n = number of units produced/sold to break-even

    • S = net sale price per unit

    • FC = fixed costs

    • VC = variable costs

Break-Even Chart Explanation

• Chart Elements:

  • Shows relationship between revenue, total costs, and break-even point in sales dollars.

  • Key Points:

    • Break-even point: where total revenue intersects total costs, indicating no profit or loss.

Sample Problems in Break-Even Analysis

Example 1: XYZ Corporation

• Price per bookcase: P65.00

• Annual Fixed Costs: P35,000

• Variable Cost per bookcase: P50.00

• Break-even Calculation:[ nS = FC + nVC ][ n(65) = 35,000 + n(50) ]

  • Required sales: 2634 bookcases.

Example 2: Monthly Production Analysis

• Production capacity: 200 units/month

• Fixed Costs: P20,000

• Variable Cost per unit: P300

• Selling Price per unit: P450

• New Fixed Costs after reduction: P18,000

  • Old Break-even Point: 248 units

  • New Break-even Point: 134 units.

Example 3: Calculator Manufacturing Costs

• Production capacity: 200 units/month

• Variable Costs per unit: P1000

• Selling Price: P2500

• Fixed Costs: P150,000

• Break-even Units: 100 calculators.

Example 4: Transistor Radio Set Production

• Labor Cost per set: P23.00

• Material Cost per set: P37.00

• Fixed Charges: P100,000/month

• Selling Price per set: P75.00

• Break-even Calculation: 7143 sets.

Example 5: Photocopy Business

• Fixed Costs: P7,500 rent + P5,000 salaries = P12,500

• Ink Cost per page: P0.10

• Electric Cost per page: P0.05

• Paper Cost per page: P0.40

• Selling Price per page: P1.00

• Required pages to break-even: 778 pages.

Final Example: Electric Motor Production

• Production Capacity: 200 motors/month

• Variable Costs per motor: P150

• Selling Price per motor: P275

• Fixed Costs: P20,000/month

• Break-even Calculation: 160 motors.

Conclusion

• Course End Note:

  • "What separates good content from great content is a willingness to take risks and push the envelope." - Brian Halligan, CEO & Co-founder, HubSpot