Example 1: The standard in a cafeteria is the preparation of 200 cheeseburgers per hour.

If labour
input produces 150 cheeseburgers per hour, how efficient is the operation?
Solution:
Labour Efficiency (%) = (Labour Output/Labour Input) * 100% = (150/200) *100%= 75%
Compared with the standard, this operation is 75% efficient in the preparation of cheeseburgers.
Example 2: Ilhan Bal makes wooden boxes in which to ship bikes. Ilhan and his three employees
invest 40 hours per day making the 120 boxes.
a.

What is their productivity?

b.

Ilhan and his employees have discussed redesigning the process to improve
efficiency. If they can increase the rate to 125 per day. What would be their new
productivity?

c.

What would be their increase in productivity?

Solution:
a.

Plabour = output/input = 120 boxes/40 hours = 3.0 boxes/hour

b.

Plabour = output/input = 125 boxes/40 hours = 3.125 boxes/hour

c.

Change in productivity = 0.125 boxes/hour

Percentage change = 0.125 boxes/hour/3.0 boxes/hour = 4.166%

Example 3: Magusa Metal Works produces cast bronze valves on a 12 person assembly line. On
a recent day, 240 valves produced during an 8 hour shift. Calculate the labour productivity.
Solution:
Total labour hours = 12 persons @ 8 hours = 96 hours
Labour productivity = 240 valves/96 hours = 2.5 valves/labour hour
Example 4: Gaye produces Final Exam Care Packages for resale by the sorority. She is
currently working a total of 6 hours a day to produce 120 care packages.
a.

What is Gayes productivity?

b.

Gaye thinks that by redesigning the package she can increase her total productivity
to 150 care packages per day. What would be her new productivity?

c.

What will be the increase in productivity if Gaye makes the change?

Solution:
a.

P = units produced/input = 120 pkgs/(1labourX6hrs) = 20 pkgs/labour hr

b.

P = units produced/input = 150 pkgs/1 labour x 6hrs = 25 pkgs/labour hr

c.

Increase in productivity = {25 pkgs/labour hr 20 pkgs/labour hr}/20 pkgs/labour hr

= 25 %

Example 5: Sergio Farmerson makes billiard balls in his famous Boston plant. With recent
increases in his costs, he has a new-found interest in efficiency. Sergio is interested in
determining the productivity of his organisation. He would like to know if his organisation is
maintaining the manufacturing average of 3% increase in productivity. He has the following data
representing a month from last year and an equivalent month this year.
Last Year

This Year

Units produced

1 000

1 000

Labour (hours)

300

275

50

45

Resin (kgs)
Capital invested (MU)

10 000

11 000

3 000

2 850

Energy (kw)
a.

Show the productivity change for each category and then determine the
improvement for labour hours, the typical standard for comparison.

b.

Sergio determines his cost to be as follows:

Labour

10 MU/hour

Resin

5 MU/kg

Capital

1% per month of investment

Energy

0.50 MU/kw

Show the productivity change, for one month last year versus one month this year, on a
multifactor basis with money units (MU) as the common denominator.

Solution:
a.
Resource

Last Year

This Year

Change

Percent Change

Labour

1000/300 = 3.33

1000/275 = 3.64

0.31

0.31/3.33 = 9.3%

Resin

1000/50 = 20

1000/45 = 22.22

2.22

2.22/20 = 11.1%

Capital

1000/10000 = 0.1

1000/11000 = 0.09

-0.01

-0.01/0.1= -10.0%

Energy

1000/3000 = 0.33

1000/2850 = 0.35

0.02

Last Year

This Year

Production

1.000 units

1.000 units

Labour hrs@10 MU

3 000 MU

2 750 MU

Resin@5 MU

250 MU

225 MU

Capital cost/month

100 MU

110 MU

Energy@ 0.50 MU

1 500 MU

1 425 MU

TOTAL..

4 850 MU

4 510 MU

b.

0.02/0.33 = 6.1%

Percent change in productivity = {1000/4850 1000/4510}/1000/4850

= -0.0752 fewer resources = 7.5% improvement
Example 6. The manager of a carpet store is trying to determine optimal installation crew size.
He has tried various crew sizes with the results shown below. Compute the average labour
productivity for each crew size. Which crew size do you recommend?
Crew Size

Meters Installed

706

1 308

1 017

1 002

1 288

692

Solution:
Crew Size

Meters Installed

Labour Productivity

706

706/2 = 353 meters/ workers

1 308

1308/4 = 327meters/ workers

1 017

1017/3 = 339 meters/ workers

1 002

1002/3 = 334 meters/ workers

1 288

1288/4 = 322 meters/ workers

692

692/2 = 346 meters/ workers

Crew Size

Average Labour Productivity

(353 + 346)/2 = 349.5 meters/ workers

(339 +334 )/2 = 336.5 meters/ workers

(327 + 322)/2 = 324.5 meters/ workers

Recommend optimal crew size = 2 workers.

Example7. The weekly output of a production process is shown below, together with data for
labour and material inputs. The standard inventory value of the output is 125 MU/unit. Overhead
is charged weekly at the rate of 1500 MU plus 0.5 times direct labour cost.
Assume a 40-hr/ week and an hourly wage of 16 MU. Material cost is 10 MU per running
meter. Compute the average multi-factor productivity for this process.

Week

Output

# workers

Material (meters)

412

2840

364

2550

392

2720

408

2790

Solution:

Week 1 =

412 (125) MU

= 1.444

[6*40*16]MU+[2840*10]MU+ [0.5*6*40*16]MU + 1500 MU

Week 2 =

364 (125)

= 1.431

5*40*16 MU+ 2550*10 MU+ 0.5*5*40*16 MU + 1500 MU

Week 3 =

392(125)

= 1.463

5*40*16 MU + 2720*10 MU+ 0.5*5*40*16 MU+1500 MU

Week 4 =

408 (125)

= 1.457

6*40*16 MU + 2790*10 MU+ 0.5*6*40*16 MU+ 1500 MU

Average = [1.444 + 1.431 + 1.463 + 1.451] / 4 = 1.447

Example 8. A company has introduced a process improvement that reduces processing time for
each unit, so that output increased by 25% with less material, but one additional worker
required.
Under the old process, five workers could produce 60 units/ hours. Labour costs are 12 MU/
hours, and Material costs (input) was previously 16 MU/unit. For the new process, material is
now 10 MU / unit. Overhead is charged at 1.6 times direct labour cost. Finished units sell for 31
MU each. What increase in productivity is associated with the process improvement?

Solution:

Before=

60 units/hr * 31 MU/units

5*12 MU/hour + 60 units/hr *16 MU/units + 1.6[5*12 MU/hr]

1860 =
1116
=1.667

After =

60 units/hr * 31 MU/units*1.25

2.325

6*12 MU/hr + 75 units/hr*10 MU/unit + 1.6 [6*12 MU /hr]

937.2
= 2.481

Productivity increase = [2.481 1.667] /1.667 * 100 = 48.83%

Example 9. Suzan has a part-time cottage industry producing seasonal plywood yard
ornaments for resale at local craft fairs and bazaars. She currently works a total of 4 hours per
day to produce 10 ornaments.
a. What is her productivity?
b. She thinks that by redesigning the ornaments and switching from use of wooden glue to
a hot-glue gun she can increase her total production to 20 ornaments per day. What is her
new productivity?
c. What is her percentage increase in productivity?

Solution:
a. Productivity = 10 ornaments/day = 2.5 ornaments/hrs
4 hrs/day
b. Productivity = 20 ornaments /day = 5 ornaments/hrs
4 hrs/day
c. Change in productivity = 5 2.5 = 2.5 ornaments /hrs
Percent change = 2.5/2.5 * 100 = 100%.

Example 10. Suzans Ceramics spent 3000 MU on a new kiln last year, in the belief that it would
cut energy usage 25% over the old kiln. This kiln is an oven that turns green ware into finished
pottery. Suzan is concerned that the new kiln requires extra labour hours for its operation. Suzan
wants to check the energy savings of the new oven and also to look other measures of their
productivity to see if the change really was beneficial. Suzan has the following data to work
with:

Last Year

This year

Production (finished units)

4 000

4 000

Green ware(kgs)

5 000

5 000

350

375

Capital (MU)

15 000

18 000

Energy (kWh)

3 000

2 600

Labour (hours)

Were the modifications beneficial?

Solution:
Resource

Last year

This year

Change

Percent Change

Labour

4000/350 = 11.43

4000/375 = 10.67

= - 0.76

= - 6.7

Capital

4000/15000 = 0.27

4000/18000 = 0.22

= - 0.04

= - 16.7

Energy

4000/3000 = 1.33

4000/2600 = 1.54

= - 0.21

= 15.4

The energy modifications did not generate the expected savings; labour and capital
productivity decreased.

Example 11. Student tuition at EMU is $100 per semester credit hour. TRNC supplements
school revenue by matching student tuition $ per $. Average class size for a typical 3-credit
course is 50 students. Labour costs are $ 4 000 per class. Material costs are $ 20 per student per
class and overhead costs are $ 25 000 per class.
a. What is multifactor productivity?
b. If instructors work an average of 14hrs/week for 16 weeks for each 3-credit class of 50
students what is the labour productivity ratio?

Solution:
a. Multifactor productivity is the ratio of the value of output to the value of input
resources.
Value of output = (50stds/class) * (3credit hrs/student) * ($100tuition + $100 state
support/credit hr)
= $30 000/class
Value if input = Labour + Materials + Overhead
= [$4000 + ($20/std * 50stds) + $25000] / class = $30000/class
Multifactor productivity = Output / Input = $30000/class / $30000/class = 1.00
b. Labour productivity is the ratio of the value of output to labour hrs. The value of output
is same as in part a), that is $30000/class, so
Labour input = (14hrs/week) * (16weeks/class) = 224hrs/class
Labour productivity = Output/Input = ($30000/class) / (224hrs/class) = $133.93/hr
Example 12. Miss X makes fashionable garments. During a particular week employees worked
360 hrs to produce a batch of 132 garments, of which 52 were seconds (meaning they are
flawed). Seconds are sold for 90MU at factory outlet store. The remaining 80 garments are sold
at retail distribution at 200 MU each.

What is the labour productivity ratio?

Solution:
Value of output = (52 defective * 90MU/defective) + (80 garments * 200 MU/garment)
= 20 680 MU
Labour hours worked = 360 hrs
Labour productivity = Output / Input = 20680 MU / 360 hrs
= 57.44 MU/hr
Example 13A Turkish printing firm has 15 employees and processes 725 re-print orders per
week. All employees work 8 hours per day, 5 days per week. Each week , the firm spends 3 6oo
MU on wages, 1 400 MU on materials and 750 MU on overheads. Orders have an average value
of 15 MU. Calculate single-factor labour productivity and its multifactor productivity
Solution:
Single-factor productivity = 725 orders / [(15 employees)(40 hrs/employee) ] = 1.21 orders/hour
Multi-factor productivity = 725 orders / [(3 600 MU + 1 400 MU + 750 MU)] = 0.13 orders/MU
Example 14. Collis Title wants to evaluate its labour and multifactor productivity with a new
computerized title search system. The company has a staff of four, each working 8 hrs per day (for a
payroll cost of $640/pay) and overhead expenses of $ 400 per day. Collins processes and closes on 8 titles
each day. The new computerized title search system will allow the processing of 14 titles per day.
Although the staff, their work hours and pay are the same, the overhead expenses are now $800 per day.
(Answ labour productivity with old system 0.25 titles per labour hr, labour productivity with new system
0.4375 titles per labour-hour, multifactor productivity with the old system 0.0077 titles per dollar,
multifactor productivity with new system 0.0097 titles per dollar)

Beak even P
Example 2. Demir Furniture Co. manufactures and sells bedroom suites. Each suite costs
250MU and sells for 400 MU. Fixed costs at Demir Furniture total 75 000 MU. Determine the
Break-Even point using
a. Algebraic analysis
b. The general formula approach
Solution:

Data Summary:

Unit selling price = 400 MU

Cost per unit = 250 MU
Total fixed cost = 75000 MU

a. Use of the algebraic approach requires us to equate the total revenue equation and the
total cost equation. The breakeven point is the output (X0) where this equality is valid.
TR = TC
E = K
pX = F + vX
400 X = 250 X + 75000
400 X 250 X = 75000
X0 = 500 units
Demir Furniture Co. has a breakeven point of 500 units.
b. The general formula approach for strict breakeven requires the use of following formula

X0
BE =

F
pv
=

75000
400 250

= 500 units

The breakeven point equals 500 units.

Example 3
Best Cut Shops Ltd. Operates 10 haircut shops in Famagusta on a 250-days-per-year, 8 hoursper day basis. They charge 10 MU for a haircut. One shop has annual fixed costs of 84000 MU
and variable costs estimated at 3 MU per customer.
a. What is the contribution per customer?
b. How many customers per hour must the shop average in order to break even?

Solution:
a. Contribution = p v = 10 MU 3MU = 7 MU per customer

X0
b.

F
p v 84000 84000

12000
10 3
7
=

customers/year

12000 Customer / year

6
(250 days / year )(8 hours / day )
i.e.

customers/hour

Example 4
If fixed costs are 40000 MU and variable costs are estimated at 50% of the unit selling price
of 160 MU, what is BEP?
Solution:

X0

F
pv
=

40000
500
160 80

units

Example 5
The owners of a professional football team have leased a 30000-seat-stadium for six games
for a fixed cost of 1680000 MU. They expect variable costs to run 4 MU per spectator and
tickets will sell for an average of 24 MU each. How many tickets, on average, must be sold per
game for the owners to just break even?
Solution:

X0

F
p v 1680000 1680000

84000
24 4
20
=

Seats / game

seats / year

84000 seats
6 games / year
= 14000 seats / game

Example 6
A computer company plans to produce 30000 computers next year. They will sell for 700 MU
each. The fixed cost of operation care 5 million and total variable costs are 6 million MU. What
is the break-even point?

Solution:

X0

F
pv

6000000 MU
30000 units

where

X0

= 200 MU / unit

5000000 MU
(700 MU 200 MU ) / unit
= 10000 units

Example 7
A DVD player sells for 350 MU and has variable cost of 85 MU.
a. Find the contribution
b. Find the contribution ratio
Solution:
a. Contribution = p v = 350 MU 85 MU = 265 MU

pv
v
85
265
1 1

0.76
p
p
350 350

b. Contribution margin
Example 8
Izmir Shoe-City Ltd. Produces 24000 pairs of running shoes per month. Annual fixed costs
are 840000 MU and the contribution from each pair is 60% of their 20 MU per-unit selling price.
Find the break-even volume.
Solution:

X0

F
840000

pv
12
70000 pairs

Where p v = 0.60 (20) = 12

X 0 ( MU )

F
1

v
p

840000
1400000
0 .6

or

MU

X 0 (Units)

1400000 MU
70000
20 MU / unit
pairs

Example 9
Turkish airlines offers customers a vacation plan for 520 MU. The Airline estimates that the
fixed costs associated with this plan are 720000 MU and at a volume of 3000 passengers the
total variable cost would be 480000 MU and profits should be 360000 MU.
a. Find the break-even volume
b. If fixed costs remained constant, how many additional passengers (beyond Break-even)
would be required to increase profits to 500000 MU?
Solution:

X0

F
720000

2000
p v 520 160

a.

passengers

where
v = 480 000/3000 = 160MU/passenger
b.

Contribution = p v = 520 160 = 360 MU/passengers

500000
1389
360
# of passenger =

passengers

or
= ( TS BEP )( p v ) 500 000 = ( X1 2 000 )( 360 ) X1 = 3 389 passengers
1389 additional passengers over break-even point.
Example 10
Cyprus Packing Ltd. Packages orange juice in 300 cl. cans which they sell to grocery
distribution warehouses for 48 MU/case. The packing company has fixed costs of 324000 MU
and variable costs of 30 MU/case. The plant has a capacity of 100000 cases per season.
a. Find the contribution
b. How many cases must be sold to break-even?
c. What is the profit (or loss) if the plant operates at full capacity for the season?
Solution:

a. Contribution = price/unit variable cost/unit = p v = 48 MU/case 30 MU/case

= 18 MU/case

X0

F
324000 MU / season

18000 cases / season

pv
18 MU / case

b.
c. = (100000 18000) (18) = 1476000 MU

Example 11
Azim Electronics has the capacity to produce 30000 networking devices per year at a plant in
Cyprus. Their variable costs are 12 MU/Unit. They are currently operating at 80% of plant
capacity, which generates a revenue of 720 000 MU/year, at current volume, the fixed costs are
360000 MU.
a. What is the current annual profit or loss?
b. What is the break-even quantity?
c. What would be the firms profit, if they could operate at 95% of capacity?
Solution:
a. Current volume = 80% ( 30000 units) = 24000 units
Profit = = TR TC = 720000 MU ( 360000 + 24000 x 12 )
= 720000 (360000 + 288000)
= 720000 648000 = 72000 MU

720000 MU (TR)
30 MU / unit
24000 units ( X )

b.

X0

360000 360000

20000
30 12
18

units

c. What would be the profit for 95% of capacity?

Capacity = 95%,

Volume = 0.95 (30000) = 28500 units

= (Sales Volume BEP) (Contribution) = (28500 20000) (18) = 153000 MU

Example 12
Tahil Ticaret Company has 30 employees and handles 1500 loads per year of grain from a
Konya warehouse. The firm has fixed costs of 70000 MU/year and variable costs of 170
MU/load.
The production and operations manager is considering installing an 80000 MU automated
material handling system that will increase fixed costs by 20000 MU/year. It will also increase
the per unit contribution of each load by 20 MU. The firm operates 250 days/year and they
receive an average of 300 MU revenue for each load passed through the warehouse.

a. what is the current annual profit (or loss)?

b. What is the new BEP volume if the investment is made?

Solution:

X0

F
70000
70000

538.46 units
p v 300 170
130

a.
= (1500 538.46) (300 170) = 125000 MU
or = TR TC = 1500 (300) 70000 + 1500 (170) = 450000 325000
= 125000 MU
b. New Fixed Cost = 70000 + 20000 = 90000 MU
Contribution = 300 170 = 130 MU
New Contribution = 130 MU + 20 MU = 150 MU

X0

F
90000

600 units
pv
150

Example 13
Process A has fixed cost of 80000 MU per year and variable cost of 18 MU/unit, whereas
process B has fixed costs 32000 MU per year and variable costs of 48 MU/unit. At what
production quantity X0 are the total costs of A and B equal?
Solution:
Set total costs equal :

TCA = TCB
FA + VA X = FB + VB X
80000 + 18 X = 32000 + 48 X
48000 = 30 X
X0 = 1600 units

Example 14
A firm has annual fixed costs of 6.4 million MU and variable costs of 14 MU/unit. It is
considering and additional investment of 1600000 MU, which will increase the fixed costs by
300000 MU/year and will increase contribution by 4 MU/unit. No change is anticipated in the
sales volume or sales price of 30 MU/unit.
What is the BE quantity if the new investment is made?

Solution:
The 4 MU increase in contribution will decrease variable cost per unit to
14MU 4 MU = 10 MU/unit
The addition to Fixed Costs makes them 6.4 million + 300000 MU = 6.7 million MU

X0

F
6700000

335000 units
pv
30 10

Example 15
Mohuiddin Computer Ltd. Produces a computerized monopoly game and wishes to establish
a break-even analysis report. The game sells for 37.50 MU each, but volume has never been
dropped below 4000 units and the costs are not accurately classified into fixed and variable
costs. Although 72000 MU of costs are reported as fixed, some of the variable cost items
(e.g selling and administrative) have fixed components. The following cost data is available for
two representative volumes.
Costs at volume of
4000 units

12000 units

Labour

20000 MU

Material

50000

110000

Overhead

78000

88000

Sell& Adm.

30000

40000

Total other costs

178000 MU

Known fixed costs

72000
250000 MU

40000MU

278000 MU
72000
350000 MU

Solution:

change in Total Costs

change in Total Quantity
a. The slope of the total cost line, i.e.

, gives us the variable

cost / unit.

350000 MU 250000 MU 100000 MU

12.50
12000 units 4000 units
8000 units
MU/unit

b. In order to find fixed costs, we can subtract total variable cost from total cost of either for
4000 units or 12000 units.

F = Total Cost @ 4000 units 4000 x 12.50

= 250000 MU 50000 MU = 200000 MU

c.

Contribution is = p v = 37.50 MU 12.50 MU = 25.00 MU/unit

X0

200000
8000 units
25

d.
e.

Estimation of profit at a volume of 10000 units

Profit = TR TC

= (10000 x 37.50) (200000 + 10000 x 12.50)

= 50000 MU
= (Total Sales BEP) (p v) = (10000 8000) (37.50 12.50) = 5000 MU

or
Example 16

Cheap-Shot Retailing is currently purchasing a certain commodity at a cost of 7 MU/unit and

is selling the item at a price 10 MU/unit. Total fixed cost is 15,000 MU. An offer is made by the
wholesaler to provide the item at a cost of 6 MU/unit, if Cheap-Shot will guarantee a minimum
annual purchase of 7,500 units. In considering the offer, it is determined that acceptance will
require a 20% increase in fixed costs; and, because of the reduced unit cost, the product could be
sold at a 15% lower price than the current retail price. The current sales level is 6,000 units per
year; it is estimated that the price reduction will increase sales by 30%.
Should the offer be accepted or rejected?
Solution:
Data Summary:
Current Operating Data Projected Operating Data
Fixed Cost

15000 MU

18000MU

Variable cost/unit

Unit Selling price

10

8.5

Estimated Sales Level (units) 6000

7800

Units Purchased

7800

6000

* F.Cost = 15000 MU + 0.20 (15000 MU) = 18000 MU

S. Price / unit = 10 MU 0.15 (10MU) = 8.50 MU
Sales (units) = 6000 + 0.30 (6000) = 7800 units
a. Method 1: Break-Even Analysis

X 01

X 02

15000
5000 units
10 7

18000
7200 units
8 .5 6

(For current operations)

(For projected operations)

Acceptance of the wholesalers offer will increase the BEP_ from its current level of
5000 units to 7200 units, a 44% increase.
This, in turn, will REDUCE the sales above the BEP from 1000 units (6000 5000) to 600
units (7800 7200).
Decision: The wholesalers offer should NOT be accepted.

b. Method 2: Cost-Profit Analysis

i.

Current operations
= (6000 5000) (10 7) = 1000 (3) = 3000 MU

or
Total Revenue

: 10 (6000) = 60000 MU

Total Cost

: 15000 + 7 (6000) = 57000 MU

Profit

: 3000 MU

The current operation produces a profit of 3000 MU.

ii.

Projected Operations
= (7800 7200) (8.5 6) = 600 (2.5) =1500 MU

or
Total Revenue

: 8.5 (7800) = 66300 MU

Total Cost

: 18000 + 6 (7800) = 64800 MU

Profit

: 66300 64800 = 1500 MU

The projected operation will result in a profit of only 1500 MU.

Decision: The wholesalers offer should be rejected because it will decrease the profit
level.
Example 17
ABC Inc., operates a medium-sized assembly line. At the present time the management of
ABC, Inc., is considering the addition of a new press to its assembly operation. If the press is
added, it will reduce variable cost by 20% per unit; however, the cost of the new press will
increase fixed cost-by 75,000 MU. Assuming no other change, and given the following current
operating data, determine whether or not the new press should be purchased.
Current operating data:
Fixed cost

250,000 MU

Variable cost per unit

40 MU

Unit Selling price

65 MU

Projected Sales

20,000 units

Solution:
Data Summary.
Current Operating
Fixed Cost

250000 MU

Addition of New Press

325000MU (increased by 75000MU)

Unit Selling price

65 MU

65 MU (no change)

Unit variable cost

40 MU

32 MU (reduced by 20%)

Projected Sales
(units)

20000

20000

a. Method 1:

BE X 0

F
250000

10000 units
p v 65 40

current operations :

BE X 0

F
325000

9848.49 units
p v 65 32

New Press
Under linear analysis, the best decision with a fixed level of output is simply select the
program that has the lowest breakeven volume. ABC Inc. should install the new press.
Although this decision will increase fixed costs by 75000 MU, it will decrease unit costs enough
to more than compensate for the change.
b. Method 2: total contribution analysis
Total Revenue :
- Cost of Goods sold
Gross Margin
(contribution)
- Total fixed cost
Profit

Current Operations
1300000 MU
800000 MU

Addition of New press

1300000 MU
640000 MU

500000 MU
250000 MU
250000 MU

660000 MU
325000 MU
335000 MU

or
(current operations) = (20000 10000) (65 40 ) = 10000 (25) = 250000 MU
(new press) = (20000 9849) (65 32) = 10151 (65-32) = 334983 MU

Using total contribution analysis, addition of the new press will increase profit from 250,000
MU to 335,000 MU. ABC Inc., should install the new press.

Example 18
A producer of digital cameras sells his product through a credit card firm at 60 MU each. The
production costs at volume 10,000 and 25,000 units are as follows:

Labour
Materials
Overhead (F + V)
Selling & administration
Depreciation & other fixed cost
Total

10,000 units
120,000 MU
240,000
180,000
100,000
160,000
----------------800,000 MU
-----------------

25,000 units
200,000 MU
400,000
220,000
120,000
160,000
----------------1,100,000 MU
-----------------

Use the data to determine the BEP.

Solution:
Note that the slope of the total cost line (that is, change in Y/change in X) is the variable cost
per unit.

Y
change in Total Costs
1100000 800000

X change in Total Quantity

25000 10000

300000
20
15000
MU / unit

In order to find Fixed Costs, we can subtract total variable cost from total cost of E.G. 10000
units.
F = Total Cost @ 10000 units 10000 x 20 = 800000 200000 = 600000 MU

X0

600000 60000

15000
60 20
40

units

Example 19
Data for a break-even analysis revealed that total costs at volumes of 600 and 800 units were
160,000 MU and 192,000 MU respectively. Revenue is 288 MU/unit. Based upon this
information, what are
a. the variable costs per unit

b. the fixed costs

c. the break-even point.
Solution:

Total Cost 192000 160000 32000

160
quantity
800 600
200

a.

Variable Cost

MU/unit

b.

F = TC@600 - vx@600 = 160000 600 (160) = 160000 96000 = 64000 MU

c.

Xo = F/(p-v) = 64 000 / (288-160) = 500 units

Example 20
Guzel Havuz Ltd. Sells their product for 6,000 MU each, at a volume of 20 units, their labor,
materials, overhead and other costs total is 120,000 MU and at a volume of 40 units the total is
160,000 MU.
a. What is your best estimate of the variable cost per unit?
b. Estimate the fixed costs.
c. At what volume does the firm break-even?
d. Estimate the profit at a volume of 60 units.
Solution:

Total Cost 160000 120000 40000

2000
quantity
40 20
20

a.

b.

F = TC@20 - vx = 120000 20 (2000) = 80000 MU

X0
c.
d.

MU/unit

80000
80000

20
6000 2000 4000

units

= (60 20) (6000 2000) = 40 (4000) = 160000 MU

Example 21
ABC, a medium-sized manufacturing firm, is considering the addition of a new machine to
its present assembly operation. The machine is expected to reduce variable cost by 15% per unit;
however, it will add 60,000 MU to total fixed cost. Assuming no other change, and given the

following current operating data, determine whether or not the new machine should be
purchased.
Current operating data:
Fixed cost

200,000 MU

Variable cost per unit

20 MU

Unit selling price

30 MU

Expected annual sales

30,000 units

Solution:
Data Summary:
Current Operating
Anticipated Operating
Data (before purchase) Data (after purchase)
Fixed Cost
200000 MU
260000 MU
Unit variable cost
20 MU
17 MU
Unit Selling price
30 MU
30 MU
Estimated annual sales
30000 Units
30000 units

Method 1: Break-Even Analysis

X0
a. Prior to acquisition :

X0
b. After acquisition:

200000
20000 units
30 20

260000
20000 units
30 17

(For projected operations)

Break-even analysis suggests that ABC should be indifferent with regard to the purchase of
the additional equipment.
The decrease in variable cost per unit is exactly offset at the level by the increase in fixed
cost. So the firm does not appear to benefit from the acquisition.
Method 2: Cost-Profit Analysis
a. Prior to acquisition
Total Revenue

: 30 (30000) = 900000 MU

Total Cost

: 200000 + 20 (30000) = 800000 MU

Profit

: 900000 800000 = 100000 MU

or
= Sales (units) BEP (units) p v
= (30000 20000) (30 20) = 100000 MU
b. After acquisition
Total Revenue : 30 (30000) = 900000 MU
Total Cost

: 260000 + 17 (30000) = 770000 MU

Profit

: 900000 770000 = 130000 MU

or
= Sales (units) BEP (units) p v
= (30000 20000) (30 17) = 130000 MU
If the new equipment is purchased, ABC will receive a profit of 130000 MU.

Break-Even Analysis alone may no be sufficient to solve a DECISION problem. If Sales

Levels are known or can be estimated with a satisfactory degree of accuracy, these should be
incorporated into the analysis.
The joint utilization of BE and C-P calculations is one way of extracting meaningful
information for Decision Making.

Example 22
Azim Industries is considering a revision of its current advertising program. The current
program requires a fixed investment of 15,000 MU. The proposed program will require a fixed
investment of 25,000 MU. Azims products currently retail at 125 MU/unit and cost 100
MU/unit.
a.

Using the data at hand, what effect would the revised program have on Azims breakeven volume?

b.

If the maximum output for the Azim is 1,500 units, should the revised program be
undertaken? Why or why not?

Solution:
Data Summary.
Fixed Cost
Selling price / unit
Cost / unit

Current Program
15000 MU
125 MU
100 MU

Revised Progra
25000 MU
125 MU
100 MU

a.
i. Break-even using the current program

X 01

15000
600 units
125 100

ii Break-even using the revised program

X 02

25000
1000 units
125 100

The revised program has a break-even point of 1000 units

b. Since Azims output is fixed at 1500 units, a decision on implementing the revised
program can be made on the basis of optimum profit.
Sales (units)
Total Revenue
Cost of Goods
Gross Margin
Total variable costs
Total contribution

Current Program
1500
187500 MU
150000 MU
37500 MU
0
37500 MU

Revised program
1500
187500 MU
150000 MU
37500 MU
0
37500 MU

Total fixed cost

Profit

15000 MU
22500 MU

25000 MU
12500 MU

or
(current) = (1500 600) (125 100) = 900 (25) = 22500 MU
(revised) = (1500 1000) (125 100) = 500 (25) = 12500 MU
On the basis of profit, the revised program should not be undertaken. Since there are no
adjustments in the selling price per unit or unit costs, the revised program will simply decrease
Azims profit by the amount of the cost increase.
IMPORTANT!
Under linear analysis, the best decision with a fixed level of output is simply Select the
program that has the lowest BE volume.

Example 23
Refinery operations at Altinoglu Station, a single-proprietor operation, necessitate the leasing
of certain equipment at the rate of 350 MU/month. Altimoglu has three employees whose total
wages are 1,650 MU/month. Utilities cost Altinoglu a total of 250 MU/month. The contribution
margin is 0.20 MU/gallon.
What is the break-even point for Altinoglu?
Solution:
Data Summary :
Cost of Utilities
Employee wage
Lease rate
Contribution margin

BEP X 0

= 250 MU / month
= 1650 MU / month
= 350 MU/ month
2250 MU / month
0.20 MU / Gallon

F
2250

11250 gallons
p v 0.20

Altinoglu will break even at a volume of 11250 gallons of gasoline.

Example 24
Azim Consultants is operating on an annual volume of 750,000 MU revenue from services.
Total variable cost for Azim is 250,000 MU. If Azim has a total fixed cost of 200,000 MU, at
what volume revenue does it break even?

Solution:
Data Summary:
Total variable cost / year

= 250000 MU

Total fixed cost

= 200000 MU

Total revenue

= 750000 MU

BE ( MU ) X 0 ( MU )

Fixed Cost
F
200000
200000

300000 MU
Total var iable cos t
vx
250000
1
1
1
1
1
Total annual sales
px
750000
3

Azim Consultants will break even with an annual volume of 300000 MU.
Example 25
Genel Saglik Hospital currently purchases a certain type of surgical supply at a cost of 15
MU/unit. When the surgical units are required, Hospital charges 25 MU/unit. A local medical
supplier has offered to provide the surgical supply a cost of 10 MU/unit if Hospital will
guarantee a minimum annual purchase of 4,000 units.
In considering the offer, the directors of Saglik Hospital have determined that acceptance will
require a 30% increase in fixed cost; however the patient charge could be reduced 20% on a per
unit basis. At the present time, Saglik uses 2,500 units each year, but it has been said that the
hospital will increase its use rate by 40% in the coming year. In addtion Saglik current policy
requires a fixed investment of 30,000 MU in its supply program. Acceptance of this offer will
increase this fixed investment to 50,000 MU.
Should the offer be accepted or rejected? Why?
Solution:
Data Summary:
Current Policy
Fixed Cost
30000 MU
Price / unit - service
25 MU
Cost / unit - service
15 MU
Annual purchase
3500 units
Method 1 Break even Analysis

Revised Policy
39000 MU
20 MU
10 MU
4000 units

a. Current Policy

X 0C

30000
3000 units
25 15

= (use rate BEP) (p v) = (3500 3000) (25 15) = 5000 MU

b. Revised Policy

X 0R

39000
3900 units
20 10

= (use rate BEP) (p v) = (4000 3900) (20 10) = 1000 MU

Under its current purchase policy, hospital can expect to break even when it uses 3000 units
of surgical material. Its expected usage is 3500 units, a situation which will result in an expected
profit of 5000 MU.
Under the revised purchase policy, hospital expected break-even point is 3900 units. This
leads the hospital to 1000 MU profit. Hospital should not accept suppliers offer. The current
purchase policy is more economical.
1.1. MULTIPLE BREAK-EVEN ANALYSIS
Few manufacturing firms produce only one class of product. Because of consumer demand
for multiplicity of styles and colours, it is unusual to find a manufacturing operation that does
not produce at least two types of products for sale. When determining the break-even volume
and related profit levels for multi-product operations, the concepts previously noted are still
valid. However, it is necessary to rearrange the data so that the basic formulas can be applied.
The following example demonstrates the required procedure.
Example 26
The ABC Co. a small manufacturing firm, produces three grades of boat paddles; A, B, C.
Last year the firm produced at 100% capacity, which represented a 2 000 000 MU sales volume,
and it sold all units that were produced. Fixed costs for the firm totalled 250 000 MU.
An analysis of the accounting and sales records for the past year reveals that Grade A paddles
cost 12 MU/set, sold for 20 MU/set and contributed 1 000 000 MU to total sales; Grade B

paddles cost 9 MU/set, sold for 12 MU/set and contributed 600 000 MU to total sales; Grade C
paddles cost 4 MU/set, sold for 8 MU/set and contributed 400 000 MU to total sales.
The owner is interested in determining;
1.The BE Sales Volume,
2.The loss that would be expected if capacity was reduced by 10%.
Assuming that the cost sales trend of the preceding years will be appreciate, prepare a report
that provides the required information.

Solution:
a.
Produ
ct
A
B
C

Price/u
nit
20 MU
12 MU
8 MU

Variable
Cost/unit
12 MU
9 MU
4 MU

Total Sales
1 000 000
600 000
400 000
E = 2 000
000

% of
Sales
0.50
0.30
0.20
1.00

1V/P
0.40
0.25
0.50

Weighted %
Contribution
0.200
0.075
0.010
Ek = 0.375

Fixed costs: 250 000 MU

Capacity: 2 000 000 MU
BEfirm (MU) = Fixed Costs / Weighted % Contribution
BEfrm (MU) = F / k
= 250 000 / 0.375 = 666 667 MU
The firm must sell a total volume of 666 667 MU to break-even.
b.

To determine the effect on profit of a 10% capacity reduction, we calculate the profit
at 100% capacity and the profit at 90 % capacity.
At 100% Capacity
100% = (Total Sales at 100% Capacity BEP) * (k)
= (2 000 000 666 667) * (0.75) = 500 000 MU

At 90 Capacity
90% = (Total Sales at 90% Capacity BEP) * (Ek)
= (1 800 000 666 667) (0.375) = 425 000 MU
In response to the owners request, the following data would be transmitted:
a. The break-even volume is 666 667 MU
b. The effect of a 10% reduction in capacity is a profit decrease of (500 000 425 000) 75
000 MU. Thus, the 10% capacity reduction results in an estimated 15% reduction in
profit [(425 000 500 000) / 500 000] = -15%