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Engineering Economy Module 5

Break-Even Analysis estimates the sales level needed for a business to cover its expenses, with the Break-Even Point (BEP) being where revenues equal total expenses. Key factors include fixed costs, variable costs, and contribution margin, while strategies to lower the break-even point involve reducing costs or raising prices. The analysis has advantages in illustrating cost and production relationships but is limited to single product assessments and may face challenges in cost classification.

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0 views6 pages

Engineering Economy Module 5

Break-Even Analysis estimates the sales level needed for a business to cover its expenses, with the Break-Even Point (BEP) being where revenues equal total expenses. Key factors include fixed costs, variable costs, and contribution margin, while strategies to lower the break-even point involve reducing costs or raising prices. The analysis has advantages in illustrating cost and production relationships but is limited to single product assessments and may face challenges in cost classification.

Uploaded by

tan.roxyshane
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Module 5

BREAK-EVEN ANALYSIS

Engr. Gerard Ang


School of EECE
Definition of Terms
➢ Break-Even Analysis – it involves estimating the
level of sales necessary to operate a business on
a break-even basis.
➢ Break-Even Point (BEP) – is defined as the point
where sales or revenues equal total expenses.
➢ Break-Even Margin – is 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.
Break-Even Graph
Break-Even Chart – shows the graph of fixed cost,
variable cost and expected income from sales for
different production levels.
Ways to Lower the
Break-Even Point
➢ Lower direct costs, which will raise the
gross margin.
➢ Exercise cost controls on your fixed
expenses, and lower the necessary
total expenses.
➢ Raise prices.
Key Break-Even Factors
➢ Fixed Costs – these costs remain constant (or nearly so)
within the projected range of sales levels. These can include
facilities costs, certain general and administrative costs, and
interest and depreciation expenses.
➢ Variable Costs – these costs vary in proportion to sales
levels. They can include direct material and labor costs, the
variable part of manufacturing overhead, and transportation
and sales commission expenses.
➢ Contribution Margin – this is equal to sales revenues less
variable costs. This amount is available to offset fixed
expenses and (hopefully) produce an operating profit for the
business.
Appraisal of Break-Even Analysis
Advantages of Break-Even Analysis
➢ It points out the relationship between cost, production
volume and returns.

Limitations of Break-Even Analysis


➢ It is best suited to the analysis of one product at a time.
➢ It may be difficult to classify a cost as all variable or all
fixed.
➢ There may be a tendency to continue to use a break-even
analysis after the cost and income functions have
changed.

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