= an introductory presentation = BREAK-EVEN ANALYSIS = an introductory presentation =

PRODUCTION IN GENERAL Produce goods or services Follows input-process-output pattern Objective: profit maximization 2 key variables concerning the objective: total revenue (R) and total cost (C)

COMPONENTS OF TOTAL COSTS IN BEA Fixed costs (F): do not depend on sales volume Example: rent, salaries for permanent employees Variable costs (V): change directly with sales volume. In BEA, V = vQ, v = variable cost per unit Example: shipping costs, costs of raw material purchases

REVENUES IN BEA Sales Revenue = PQ P = sale price per unit Q = sales quantity in unit In BEA, it is assumed that Total Revenue, TR = PQ [meaning that all the revenues are from sales]

PROFIT (MATHEMATICS STANDPOINT) π = Total Revenue – Total Cost (= TR-TC) π > 0 ⇔ TR > TC ⇔ π = profit π < 0 ⇔ TR < TC ⇔ π = loss π = 0 ⇔ TR = TC ⇔ break-even π is often called: EBIT (earnings before interest and taxes)

BREAK-EVEN POINT (BEP) is the level of sales necessary to cover all operating costs (TC) At BEP: EBIT = 0 EBIT = 0 ⇔ R = C ⇔ PQ = F + vQ and these are equivalent to:

IN BREAK-EVEN CONDITION:

SAMPLE PROBLEM In a production of certain goods, the variable cost per unit is Rp 20 and the sale price per unit is Rp 40. If the fixed cost in the production is Rp 1000, determine: a) BEP, b) the total revenue at BEP, c) the total cost at BEP.

ILLUSTRATION BEP = 50 units E = Break- even Point (BEP) If Q > BEP we gain profit If Q < BEP we suffer loss