1. Break-Even Analysis

2. What is Break Even Analysis & BEP?
A technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.
The break-even point (BEP) is the quantity at which total revenue and total costs are equal.
Profit comes from any units sold beyond the BEP.

3. Formula MUST Account for All Expenses
The simple break-even formula discussed previously assumes total costs are equal to variable costs.
In reality businesses have fixed and variable costs.

4. Costs Total costs: Fixed costs: Variable costs:
Total expenses incurred by a firm in producing and marketing a product.
Fixed costs:
The firm’s expenses that are stable and do not change with the quantity of product produced.
Variable costs:
The sum of the expenses of a firm that vary directly with the quantity of products produced and sold.

5. How to Calculate BEP BEPQuantity = Fixed Cost
Unit price – Unit Variable cost

6. Frame Shop BEP?
BEPQuantity = $28,000 $ = 400 pictures

7. Calculate Profit for the following Number of Picture Frames Sold:
Quantity
Sold
Selling
Price
Total
Revenue
Unit Cost
Total Variable Cost (TVC)
Fixed Cost (FC)
Total Cost (TC)
Profit
(TR-TC) O
$100
$30
$28,000
-28,000
200
20,000
6,000
$34,000
-14,000
400
40,000
12,000
$40,000
600
60,000
18,000
$46,000
14,000
800
80,000
24,000
$52,000
28,000
1,000
100,000
30,000
$58,000
42,000
1,200
120,000
36,000
$64,000
56,000

8. Frame Shop BEP?
Selling price of $75: BEPQuantity = $28,000 $75-30 Selling price of $75 = pictures Selling price of $125: $ = pictures

9. Relationship Between Selling Price and BEP
The higher the selling price the lower the BEP

10. Frame Shop BEP?
Unit cost of $25: BEPQuantity = $28,000 $ Selling price of $75 = pictures Unit cost of $35: $ = pictures

11. Relationship Between Unit Cost and BEP
The higher the unit cost the higher the BEP