Course Code: ECO 017
Course Title: Engineering Economics
Students’ Activity Sheet # 15
Name: Class number:
Section: Schedule: Date:
Lesson title: BREAK-EVEN ANALYSIS Materials: Ballpoint, Notebook, Calculator
Text book: Engineering Economy by
Lesson Objectives: Hipolito B. Sta. Maria, 3rd Ed
At the end of the lesson, you should be able to: References:
1. Define Break-even analysis 1. Engineering Mathematics vol 2 by
2. Define the nature and importance of Gillesania
Break-even analysis 2. investopedia.com
3. https://cleartax.in/s/break-even-analys
Productivity Tip
PRIORITIZE YOUR
TASKS
ACCORDINGLY
A. LESSON PREVIEW/REVIEW
Introduction
The following topics shall be accomplished in this module:
1. Define Break-even analysis
2. Define the nature and importance of Break-even analysis
Activity 1: What I Know Chart, part 1
What I Know Questions: What I Learned
(Activity 4)
1. What is break-even? `
2. Components of
break-even analysis?
3 Use of break-even
analysis.
B. MAIN LESSON
Activity 2: Content Notes
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Course Code: ECO 017
Course Title: Engineering Economics
Students’ Activity Sheet # 15
Name: Class number:
Section: Schedule: Date:
BREAK-EVEN ANALYSIS
A break-even analysis involves the determination of the value of a specified variable that will make
the revenues exactly equal to the costs - i.e. break-even. This technique can be used for one project or
for determining the best of two or more alternatives. The basic technique involves identifying the variable
of interest and then finding the magnitude of that variable that will lead to break-even. Once the break-
even point is known, the available information about whether that variable is likely to have a value above
or below the break-even point can be used to determine which course of action should be taken. The next
example illustrates a break-even calculation.
Break-even analysis is useful in the determination of the level of production or a targeted desired
sales mix. The study is for management’s use only, as the metric and calculations are not necessary for
external sources such as investors, regulators or financial institutions. This type of analysis depends on a
calculation of the break-even point (BEP). The break-even point is calculated by dividing the total fixed
costs of production by the price of a product per individual unit less the variable costs of production. Fixed
costs are those which remain the same regardless of how many units are sold.
Break-even analysis looks at the level of fixed costs relative to the profit earned by each additional
unit produced and sold. In general, a company with lower fixed costs will have a lower break-even point of
sale. For example, a company with $0 of fixed costs will automatically have broken even upon the sale of
the first product assuming variable costs do not exceed sales revenue. However, the accumulation of
variable costs will limit the leverage of the company as these expenses come from each item sold.
Components of Break Even Analysis
Fixed costs
Fixed costs are also called overhead costs. These overhead costs occur after the decision to start
an economic activity is taken and these costs are directly related to the level of production, but not the
quantity of production. Fixed costs include (but are not limited to) interest, taxes, salaries, rent,
depreciation costs, labour costs, energy costs etc. These costs are fixed rrespective of the production. In
case of no production also the costs must be incurred.
Variable costs
Variable costs are costs that will increase or decrease in direct relation to the production volume.
These costs include cost of raw material, packaging cost, fuel and other costs that are directly related to
the production.
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Course Code: ECO 017
Course Title: Engineering Economics
Students’ Activity Sheet # 15
Name: Class number:
Section: Schedule: Date:
Contribution Margin
Break-even analysis also deals with the contribution margin of a product. The excess between the
selling price and total variable costs is known as contribution margin. For an example, if the price of a
product is P100, total variable costs are P60 per product and fixed cost is P25 per product, the
contribution margin of the product is P40 (P100 – P60). This P40 represents the revenue collected to
cover the fixed costs. In the calculation of the contribution margin, fixed costs are not considered.
When is Break even analysis used?
Starting a new business: To start a new business, a break-even analysis is a must. Not only it
helps in deciding whether the idea of starting a new business is viable, but it will force the startup to be
realistic about the costs, as well as provide a basis for the pricing strategy.
Creating a new product: In the case of an existing business, the company should still peform a break-
even analysis before launching a new product—particularly if such a product is going to add a significant
expenditure.
Changing the business model: If the company is about to the change the business model, like,
switching from wholesale business to retail business, then a break-even analysis must be performed. The
costs could change considerably and breakeven analysis will help in setting the selling price.
Break-even analysis is useful for the following reasons:
It helps to determine remaining/unused capacity of the company once the breakeven is reached.
This will help to show the maximum profit on a particular product/service that can be generated.
It helps to determine the impact on profit on changing to automation from manual (a fixed cost
replaces a variable cost).
It helps to determine the change in profits if the price of a product is altered.
It helps to determine the amount of losses that could be sustained if there is a sales downturn.
Additionally, break-even analysis is very useful for knowing the overall ability of a business to
generate a profit. In the case of a company whose break-even point is near to the maximum sales level,
this signifies that it is nearly impractical for the business to earn a profit even under the best of
circumstances.
Therefore, it’s the management responsibility to monitor the break-even point constantly. This
monitoring certainly reduces the break-even point whenever possible.
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Course Code: ECO 017
Course Title: Engineering Economics
Students’ Activity Sheet # 15
Name: Class number:
Section: Schedule: Date:
Ways to monitor Break even point
Pricing analysis: Minimize or eliminate the use of coupons or other price reductions offers, since
such promotional strategies increase the break-even point.
Technology analysis: Implementing any technology that can enhance the business efficiency,
thus increasing capacity with no extra cost.
Cost analysis: Reviewing all fixed costs constantly to verify if any can be eliminated can surely
help. Also, review the total variable costs to see if they can be eliminated. This analysis will
increase the margin and reduce the breakeven point.
Margin analysis: Push sales of the highest-margin (high contribution earning) items and pay
close attention to product margins, thus reducing the breakeven point.
Outsourcing: If an activity consists of a fixed cost, try to outsource such activity (whenever
possible), which reduces the breakeven point.
Benefits of Break-even analysis
Catch missing expenses: When you’re thinking about a new business, it’s very much possible
that you may forget about a few expenses. Therefore, a break-even analysis can help you to
review all financial commitments to figure out your break-even point. This analysis certainly
restricts the number of surprises down the road or atleast prepares a company for them.
Set revenue targets: Once the break-even analysis is complete, you will get to know how much
you need to sell to be profitable. This will help you and your sales team to set more concrete
sales goals.
Make smarter decisions: Entrepreneurs often take decisions in relation to their business based
on emotion. Emotion is important i.e. how you feel, though it’s not enough. In order to be a
successful entrepreneur, decisions should be based on facts.
Fund your business: This analysis is a key component in any business plan. It’s generally a
requirement if you want outsiders to fund your business. In order to fund your business, you
have to prove that your plan is viable. Furthermore, if the analysis looks good, you will be
comfortable enough to take the burden of various ways of financing.
Better Pricing: Finding the break-even point will help in pricing the products better. This tool is
highly used for providing the best price of a product that can fetch maximum profit without
increasing the existing price.
Cover fixed costs: Doing a break-even analysis helps in covering all fixed cost.
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Course Code: ECO 017
Course Title: Engineering Economics
Students’ Activity Sheet # 15
Name: Class number:
Section: Schedule: Date:
Activity 3: Skill-building Activities
Answer the following question
1. When a business has made enough money to pay its costs and
begin to make a profit, it has reached its?
2. Fixed Expenses do not change in total when there is a modest
change in sales. (true or false)
Used the given statement
Selling Price: P1,700
Fixed expenses
Selling and administrative P13,000,000
Interest and expenses P1,000,000
Variable expenses
Cost of goods sold P400
Selling and administrative P300
What is the company’s contribution margin?
Activity 4: What I Know Chart, part 2
What I Learned
1. _________________________________________________________________________________
_________________________________________________________________________________
2. _________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
Activity 5: Check for Understanding
True or False
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Course Code: ECO 017
Course Title: Engineering Economics
Students’ Activity Sheet # 15
Name: Class number:
Section: Schedule: Date:
1. If a company has mixed expenses, the fixed component can be combined with the
company's fixed expenses and the variable component can be combined with the
company's variable expenses.
2. The contribution margin per unit is the selling price per unit minus the fixed expenses per
unit.
3. Break-even analysis is useful for companies that sell products, but it is not useful for
companies that provide services.
C. LESSON WRAP-UP
Activity 6: Thinking about Learning
A. Work Tracker
{
*
*
T
B
.
Think about your Learning
1. What motivated you to finish the lesson today?
________________________________________________________________________
________________________________________________________________________
2. What could you have done better to improve your learning today?
_________________________________________________________________________
_________________________________________________________________________
KEY TO CORRECTIONS (refer TG’s)
Activity 3
1. Break-even point
2. True
3. P1000
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