Break Even Analysis

PROFIT AND
LOSS
Slide 5
PROFIT AND LOSS
a. Differentiate profit from loss. (ABM_BM11BS-Ii-6)
b. Illustrate how profit is obtained and how to avoid loss in a given
transaction (ABM_BM11BS-Ii-7)
c. Define break-even; illustrate how to determine break-even point
(ABM_BM11BS-Ij-8)
• Put the words with its corresponding amount into its proper place in the
financial statement. Make the calculation to see if the company incurred
Profit or Loss.
• Net Profit: 35,500 Other Income: 2,300
• Operating Profit: 34,400 Sales: 117,000
• Cost of Sales: 59,000 Operating Expenses: 23,600
• Other Expenses:1,200 Gross Margin/Profit: 58,000
Income Statement for the Year 2023

Sales 117,000
1 Cost of Sales 59,000
2 Gross Margin/Profit 58,000
3 Operating Expenses 23,600
4 Operating Profit 34,400
5 Other Income 2,300
6 Other expenses 1,200
7 Net Profit 35,500
Slide 5
• Cost is the cost of the product sold or service rendered.
• Expenses refer to operating expenses (administrative and selling expenses) and
financial expenses (interest and other finance charges).
• Profit is what remains of the selling price (sales) after all costs and expenses had been
deducted.
• Loss occurs when the cost and expenses exceed the selling price or sales.
• For Example:
• Carmen does buy and sell. She bought a perfume for ₱450.00. She sold it for ₱600.00.
• A. How much was her margin (sales minus the cost)?
• Answer: 600-450=150
• B. What was the rate of her margin? (𝑀𝑈-𝑠𝑝.)- (calculated as margin divided by the
sales)?
• Answer: 150/600=25%
• C. What was the markup based on cost?
• Answer: 150/450= 33.33%
• D. How much profit did she earn?
• Answer: 600-450= 150
• Income Statement is the financial statement that shows the results of
operation if it earns a profit or incurs a loss for a given period of time.
• Cost of sales is the purchase price and other expenses incurred in buying
the products that the business has to sell including the freight-in or
transportation of the goods it buys for resale.
• Operating expenses are expenses incurred to run the business.
• Other income includes interest income and other incidental income the
firm earns like rent income if it has a property being rented out.
• Other expense includes interest expense or finance charges financial
institutions charge firms for their services.
• Gross profit is at times referred to as gross margin.
• Operating profit/loss is gross profit less operating expenses.
• Net profit/loss is operating profit plus other income less other expenses.
• Break-even Point is the point where a business neither makes a profit
nor a loss.
• Sales = Variable costs + Fixed Costs
• Sales = Variable costs + Fixed Costs
• Variable costs are costs that vary with output. Variable costs increase
at a constant rate relative to labor and capital. (includes raw materials,
packaging, and labor directly involved in a company’s manufacturing
processes).
• Fixed costs remain the same no matter how much output a company
produces (rent, salaries, property taxes, insurance, etc.)
• Formula of Breakeven Point:
• If we let 𝑥 represent the number of units to break-even, we can use the
following formula adopted from the previous formula:
• 𝑷𝒙 = 𝒗𝒙 + 𝑭𝑪
• 𝑷 is the unit price 𝑽 is the variable cost per unit
• 𝒙 is the number of units 𝑭𝑪 is the total fixed cost
• To solve for 𝑥: 𝑷𝒙−𝒗𝒙=𝑭𝑪
𝒙(𝑷−𝒗)=𝑭𝑪
𝒙=(break-even point in number of units)
P-V= Gross Profit
BEP = Unit Price x BEP in units
• This is the very first step in calculating the price at which to sell a
product or service
• Marketers will play with different prices in order to see how many sales
need to be made in order to make the companies cover all of their costs
• In order to calculate the Break-Even Analysis
• Need to know Variable Costs (VC) & Fixed Costs (FC)
Example: Calculate the Break even Point in sales units and sales in peso from
the following information:
Unit Price 20.00
Variable cost 8.00
Fixed cost 12,000.00
• The number of units that a business must sell at a given price to cover its
costs
• Once the variable costs are covered – the rest of the “gross profit” goes
to pay off the fixed costs
• Gross profit is the amount the company makes on every unit sold (selling
price – purchase price)
BREAK-EVEN ANALYSIS
• A teddy-bear manufacturing company sells its
bears to retailers for an average price of 180.
The variable costs are 100 per bear. The
company’s fixed costs are 150 000. How many
bears need to be sold before the teddy-bear
manufacturer turns a profit?
BREAK-EVEN ANALYSIS
• BREAK EVEN POINT (BEP) = fixed costs / gross
profit (P-V)
• BEP = 150 000 / (180-100)
• BEP = 150 000 / 80
• BEP = 1875
• Therefore, after selling 1875 bears, the company

will turn a profit
BREAK-EVEN ANALYSIS
• (Sales Price) * (# of Units) = (Variable Costs) * (# of Units)
+ Fixed Costs
• 180x = 100x + 150 000
• 180x -100x = 150 000
• 80x = 150 000
• x = 1875
• Therefore, the company needs to sell 1875 bears to turn a

profit.
BREAK-EVEN ANALYSIS
• Graphing Break-Even Analysis
• MATH TIME!!! (go back to grade 9 or 10
math)
• You will graph both the revenue and the costs
• Bear Example
• COSTS = 100x + 150 000
REVENUES = 180x
300 000
200 000
Value
100 000
1875
# of Units
• Another example:
- A new pizza place has opened up across the
street from BCI. Each piece of pizza costs
them 0.75 of materials to make. The business
paid 50 000 for ovens, the building, advertising
and other fixed costs. They expect to sell
roughly 100,000 pieces of pizza in their first
year of operation.
- Based on their estimates,
- how much should they
- charge in order to make
- money back in the first year?
- FC= 50000, x=100,000 v=0.75
- X=FC/P-V, Px-Vx=FC; P=(FC+Vx)/x = (50,000+75000)/100000
- = 1.25
BREAK EVEN ANALYSIS
• The company must decide if the break-even point is realistic or
not.
• If not there are many things that can be done
• Reduce the Variable Costs
• Increase the Price
• Decrease the selling price to
increase the demand
• Increase the fixed costs in order
to stimulate demand
• Increase Advertising
Economies of Scale
The more products a company makes, the lower the cost of
product of each item
DISECONOMIES OF SCALE
• Remember: Getting bigger isn’t always better
• At some point – a company becomes too big in order to run
efficiently
• Have a hard time responding to the demands of their consumers &
controlling the quality of the product (American Auto Industry)
BREAK-EVEN ASSIGNMENT
1. Find the break-even point in units and in peso given that
the unit price of a certain commodity is 15.00; variable cost,
5.00 and total fixed cost, 12,000.00
2. A company’s Variable cost per unit is 7.00 and total fixed

cost at 9,000 if the company sold a total of 10,000 units
yielding a total sales of 150,000.00 . Find the BEP in units
and BEP in pesos.

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PROFIT AND

Income Statement for the Year 2023

• Therefore, after selling 1875 bears, the company

• Therefore, the company needs to sell 1875 bears to turn a

2. A company’s Variable cost per unit is 7.00 and total fixed

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