MODULE 7

BREAK-EVEN
ANALYSIS
BREAK-EVEN ANALYSIS
• The revenue from sales is expressed as a linear function of the number of
units (q) the firm expects to sell during the year. The total cost of
production can be expressed as:
Y= mx + b
Where: b= fixed cost
m= variable cost

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7.1 BREAK-EVEN ANALYSIS: LINEAR FUNCTION
• The Break-Even Point Analysis has three components:
1. Cost
2. Volume
3. Profit

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7.1 BREAK-EVEN ANALYSIS: LINEAR FUNCTION
• Cost
 The Cost (C) refers to the cost incurred by the firm during the
production of a particular product.
 These costs are fixed cost (FC) and variable cost (VC)
 The Total Cost (TC) is expressed as:
TC= VC + FC
• Volume (q)
 Refers to the level of production which can be expressed as quantity of
units produced and sold; as volume of sales in pesos or as percentage
of total capacity available.

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7.1 BREAK-EVEN ANALYSIS: LINEAR FUNCTION
• Profit (P)
 Is the difference between the total revenue (TR) and total cost (TC).
 It can be expressed as:
P = TR - TC
• Break-even point
 is the volume or level of production wherein total revenue from sales
of the product is just sufficient to cover the total cost of production. At
break-even point, profit is zero, and the total revenue equals total cost.
at BEP, P = 0
TR = TC

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7.1 BREAK-EVEN ANALYSIS: LINEAR FUNCTION
Example 7.1.1
• A company sells its product at P12 per unit. The product has a variable cost of P6
per unit and the fixed cost is P42,000. Determine each of the following:
a. a.TR, TC, and Profit functions.
b. Sales volume when profit is P18,000.
c. Profit when sales are 12,000 units.
d. The break-even quantity and revenue
e. The amount by which the unit variable cost has to be decreased or
increased for the company to break even at 4,000 units, assuming that the
selling price and the fixed cost remain constant
f. The new selling price per unit to breakeven at 600units, assuming that FC
and UVC are constant
g. The number of units to sell to cover the fixed cost
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7.1 BREAK-EVEN ANALYSIS: LINEAR FUNCTION
Example 7.1.1 – Solution
Let q = volume (or the number of units to sell)
a. TR = 12q total revenue function
TC = 6q+42,000 total cost function
P = TR – TC
= 12q – [6q + 42,000] profit function
b. P = 18,000
P= TR – TC
18,000 = 12q – 6q – 42,000
(12 – 6)(q) = 60,000
q= 10,000 units
c. If q = 12,000 units
P = 6q – 42,000
P = 6(12,000) – 42,000 = P30,000
d. At BEP, P = 0 BEP revenue:
TR = TC TR = 12q
12q = 6q + 42,000 TR = 12 (7000)
q= 7,000 units (BEP quantity) TR = P84,000
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7.1 BREAK-EVEN ANALYSIS: LINEAR FUNCTION
Example 7.1.1 – Solution
e. Let X = new VC per unit. To break even at 4,000 units
∴ at BEP ; P = 0 new TR = 12 (4000)
TR = TC new TC = 4000X+42,000
12 (4000) = 4000x + 42,000
X = P1.50 (new variable cost per unit) but since the old VC is P6 per unit, the decrease per
unit is P4.50
f. Let x = unit selling price
q = 600 units
new TR = 600x
at BEP; P = 0
TR = TC
600x = 6(600) + 42,000
x = P76 (new selling price to break-even at 600 units
g. To cover FC:
TR = FC
12q = 42,000
q = 3,500 units to sell to cover FC. of Accountancy - Management Science
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7.1 BREAK-EVEN ANALYSIS: LINEAR FUNCTION
INCREASE IN PRICE
Example 7.1.3
• Hazel Rae Garments produces hand towels at a cost of P15 per unit and
sells them at P23 each . The weekly cost of production is P5, 000.
Determine:
a. The TR, TC, and Profit functions
b. The break-even quantity and revenue
c. If the selling price per hand towel is increased to P35, find the new
break-even point (FC and VC remain constant).
d. d. If Hazel Rae is able to reduce the price to P20 per unit of the hand
towel, but, at the same time an increase of P200 in operational
overhead is incurred, is it to her advantage? (Assume VC to be
constant).
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7.1 BREAK-EVEN ANALYSIS: LINEAR FUNCTION
INCREASE IN PRICE
Example 7.1.3 – Solution
a. TR, TC and Production Function
TR = 23q
TC = 15q + 5,000
P = 23q - 15q - 5,000
= 8q - 5,000
b. The break - even quantity and revenue
at BEP, P = 0 Total revenue at BEP
TR = TC TR = 23(625)
8q - 5, 000 = 0 = P 14, 375
q = 625 units

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7.1 BREAK-EVEN ANALYSIS: LINEAR FUNCTION
INCREASE IN PRICE
Example 7.1.3 – Solution
c. If the new selling price per hand towel is increased to P35, find the new break-even point(FC and VC
remain constant).
New selling price = P35
at BEP, P = 0
TR = TC
35q = 15q + 5, 000
q = 250 units
d. If Hazel Rae is able to reduce the price to P20 per unit of hand towel, but, at the same time an
increase of P200 in operational overhead is incurred , is it to her advantage?(Assumed VC to be
constant)
At selling price = P23 per unit and FC = P5,000, the BEP is 625 units.
at selling price = P20 per unit and FC = P5,000+ P200
= P5,200
at BEP, P = 0
TR = TC
20q = 15q+ 5,200
q = 1040 units
Note: not advantageous
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7.2 BREAK EVEN ANALYSIS: NONLINEAR FUNCTIONS
Example 7.2.1
• A merchant buys a particular product at P8 per unit and sells them
at P13 per unit. His fixed cost is P40. Due to stiff competition, the
sale of the product began to decline. The unit selling price
decreased by 10% of the units sold. The variable cost and fixed
cost remain the same.

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7.2 BREAK EVEN ANALYSIS: NONLINEAR FUNCTIONS
Example 7.2.1
a. Represent the new unit selling price.
New selling price = (13 - 0.10q)
b. Determine the TR, TC and Profit function
TR = (13 - 0.10q)q
= 13q - 0.10q^2
TC = 8q + 40
P = TR – TC
= (13q - 0.10q^2) - (8q + 40)
= -0.10q^2 + 5q - 40

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7.2 BREAK EVEN ANALYSIS: NONLINEAR FUNCTIONS
Example 7.2.1
c. Find the BEP quantity and revenue
at BEP, P = 0
P = - 0.10q^2 + 5q - 40 = 0
(-0.10q^2 + 5q - 40 = 0)-10
q^2 - 50q + 400 = 0
(q -10)(q - 40) = 0
q = 10 ; q = 40
at q = 10
TR = 13q - 0.10q^2
= 13(10) - 0.10(10)^2
= P120 BEP revenue
at q = 40
TR = 13q - 0.10q^2
= 13(40) - 0.10(40)^2
= P360 BEP revenue
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7.2 BREAK EVEN ANALYSIS: NONLINEAR FUNCTIONS
Example 7.2.1
d. What is the profit at a sales volume of 55 units?
P = - 0.10q^2 + 5q - 40
= -0.10(55)^2 + 5(55) - 40
= - P67.50 (loss)

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7.2 BREAK EVEN ANALYSIS: NONLINEAR FUNCTIONS
RULES FOR DERIVATIVES
•1.  The derivative of a constant is zero
y=12, dy=0

Examples: 1. y= 7 2. y= -5
=0
2. The derivative of a variable with respect to itself is 1.
y=x,

Examples: 1. y=n 2. y=s

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7.2 BREAK EVEN ANALYSIS: NONLINEAR FUNCTIONS
RULES FOR DERIVATIVES
• 
3. The derivative of a variable raised to a power n.
,

Examples: 1. 2.

4. The derivative of function times a constant is equal to the constant times the derivative
of a function.
Y= k(x),

Examples: 1.

5. The derivative of the sum or difference of two functions is the sum or difference of their
derivatives.
Y= u+v+w+…., dy= du+dv+dv+dw+….

Examples: 1. + 2. y=+5
-25 Department of Accountancy - Management Science
7.2 BREAK EVEN ANALYSIS: NONLINEAR FUNCTIONS
RULES FOR DERIVATIVES
•   The derivative of the product of two functions is equal to the first times the derivative of
6.
the second plus the second times the derivative of the first.
y= u.v, = udv.vdu

Examples: 1.y= (2x-2)

(2)+(2x-2)()
= -6
= -6
Note: If u and v are a differentiable function of x.
2. Y= ()(3+4)
()(9)+()(2x)
=+
=+
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7.2 BREAK EVEN ANALYSIS: NONLINEAR FUNCTIONS
RULES FOR DERIVATIVES
•7.  The derivative of the quotient of two functions is equal to the
denominator times the derivative of the numerator minus the
numerator times the derivative of the denominator divided by the
square of the denominator.
y= , =
Examples: 1. y= 2. y=
= =
= =
= = =

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7.2 BREAK EVEN ANALYSIS: NONLINEAR FUNCTIONS
RULES FOR DERIVATIVES
•8. The derivative of the nth power of a function is equal to n times the function raised to
the (n-1)th power times the derivative of the function.
y= dx

Example: 1. y=
= 2() .
= ()
9. The derivative of the square root of a function is equal to the derivative of the
function, divided by twice the square root of the function.
y=,

Examples: 1. y= 2. y=
=
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7.3 FINDING THE CRITICAL POINTS OF NONLINEAR FUNCTIONS
• The following are the suggested steps in locating in the critical point(s) :
maxima (or maximum points) and minima (or minimum points).
1. Find the first derivative of the given function
2. Equate the first derivative to zero and solve for x
3. Substitute the value of x in original equation and solve for y. These
values of x and y are the coordinates in the maxima or minima
4. Test whether the point is maxima or minima by finding the second
derivative. If the second derivative is negative, the point is maxima,
and if it is positive, the point is a minima
• The second derivative is written as d2y/dx or y” reads as y – double prime.

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7.3 FINDING THE CRITICAL POINTS OF NONLINEAR FUNCTIONS
Example 7.3.1 Locate and classify the critical point(s) of y = -3x2 + 30x – 50
Solution :Step 1: Find the first derivative >>Dy/dx or y1 = -6X+30
Step 2: Equating the first derivative >> 0 = 6x +30
to zero and solving for x 6x = 30
x=5
Step3: Substitute x = 5 in the original equation and solve for y.
y = -3x2 + 30x – 50
= -3(5)2 + 30 (5) – 50
= 25
Critical points is (5,25)
Step 4: Test whether the point is a maxima or a minima by finding the 2nd derivative
dy/dx or y’ = -6X + 30 First derivative
d2 y or y” = -6 Second derivative
Since the second derivative “y” is negative, therefore the critical point (5,25) is
maximum point.
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7.4 APPLICATION OF MAXIMA AND MINIMA IN BUSINESS
•Example
  7.4.1
• A factory sells a particular product at a price of P20 per unit. If TC is the
total cost of the week’s production, and TC= ,
determine the:
a. profit function
b. number of units to be produced to maximize profit
c. maximum profit

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7.4 APPLICATION OF MAXIMA AND MINIMA IN BUSINESS
• 
Example 7.4.1 – Solution
Solution: Let q=number of units to be produced
a. Profit Function
TR=20q
TC=
P= TR-TC
P=20q-()
P= - profit function
b. Number of units to be produced to maximize profit
P’= -2q First derivative
0 = -2q 50 Equate to zero
2q = 50 Solve for q
q = 25 units no. of units to produce to max. profit
P’’ = -2 second derivative
c. Maximum Profit
P = -(25) 0 (25) 235
P = P860 (maximum since the Department
secondof derivative is negative).
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7.4 APPLICATION OF MAXIMA AND MINIMA IN BUSINESS
•Example
  7.4.2
• If TC = 0.01q – 10q 2520,
a. Find the number of units to produce for minimum cost.
b. What is the minimum cost?

Example 2 – Solution
a. TC’ = 0.02q-10 First derivative
0 = 0.02q-10Equate to zero
0.02q = 10 and solve for q
q = 500 units for minimum cost
TC’’ = 0.02 > 0, Thus 500 units is the minimum output level.
b. TC = 0.01 (500) - 10 (500) +2520
= P20 minimum cost
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7.4 APPLICATION OF MAXIMA AND MINIMA IN BUSINESS
Example 7.4.3
• The unit selling price of a particular product is P200. Due to competition it
has been decided to reduced the price by 1% of the number of units sold.
If the fixed cost is P10,000 and variable cost per unit is P150, determine:
a. TR, TC, and Profit Functions
b. The break even quantity
c. The profit at a sale of 1,000 units
d. The maximum profit
e. The number of units to sell to cover fixed cost.

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7.4 APPLICATION OF MAXIMA AND MINIMA IN BUSINESS
• 
Example 3 – Solution
Let q = volume of sales
new USP = ( 200 - 0.01q )
a. TR= ( 200 – 0.01q )q = 200q - 0.01q
TC= 150q + 10,000
P = TR – TC = ( 200q – 0.01q ) – ( 150q + 10,000 )
= - 0.01q + 50q – 10,000
b. q = -50 ±
- 0.02
q min = 209 units ( rounded off )
q max = 4, 791 units ( rounded off)
c. q = 1,000 units
TR = 190 ( 1000 )= P 190, 000
TC = 150 ( 1000 ) + 10,000 = P 160, 000
P=190, 000 – 160,000 = P 30, 000
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7.4 APPLICATION OF MAXIMA AND MINIMA IN BUSINESS
•Example
  3 – Solution
d. P = |-0.01q + 50q – 10,000|
P’ = -0.02q + 50 First derivatives
0 = - 0.02q + 50
q = = 2500 units

P= -0.01( 2500 ) + 50 ( 2500 ) – 10, 000 = P52, 500 max

Test whether the profit is maximum or minimum.

P’ = -0.02q + 50 First derivatives
P’’ = - 0.02 Second derivative
P’’ is negative Profit is maximum
e. FC/USP= 10000/200-0.01q
Q= 50 units to cover the fixed cost
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REFERENCE:
• Quantitative Techniques in Business Management/
Management Science by Asuncion C. Mercado del
Rosario

Department of Accountancy - Accounting 10 & 11 Intermediate

Accounting Part 2
 THANK YOU
STAY SAFE

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