1. The cost of production is an important factor in
almost all business analysis and decision, etc..cost
reffers to the expenses incurred in production

2. 
Cost analysis refers to the study of behavior
of cost in relation to one or more production
criteria like size of output, scale of operation,
price of factors of production

3. Break-Even Analysis
There are two basic types of costs a company incurs.
• Variable Costs
• Fixed Costs
Variable costs are costs that change with changes in production levels or
sales. Examples include: Costs of materials used in the production of the
goods.
Fixed costs remain roughly the same regardless of sales/output levels.
Examples include: Rent, Insurance and Wages

4. Break-Even AnAlysis

TOTAL COSTS
◦ Total Costs is simply Fixed Costs and Variable Costs
added together.
TC = FC + VC
◦ As Total Costs include some of the Variable Costs then
Total Costs will also change with any changes in
output/sales.

5. Unit
TFC
TVC
TC
0
60
60-60=0
60
1
60
100-60=40
100
2
60
120-60=60
120
3
60
130-60=70
130
4
60
160-60=110
160
5
60
220-60=160
220
6
60
360-60=300
360

6. Y
TC
TVC
COST
C
0
TFC
QUALITY OF OUTPUT
X

7. The Break-even point occurs when Total Costs equals Revenue
(Sales Income)
Revenues (Sales Income) = Total
Costs
At this point the business is not making a Profit nor incurring a
Loss – it is merely covering its Total Costs
Let us have a look at a simple example.
Bannerman Trading Company
opens a flower shop.

8. Fixed Costs:
•
•
Rent: £400
Helper (Wages): £200
Variable Costs:
•
Flowers: £0.50 per bunch
Selling Price:
• Flowers: £2 per bunch
So we know that:
Total Fixed Costs = £600
Variable Cost per Unit = £0.50
Selling Price per Unit = £2.00

9. Break-Even Analysis
SP = £2.00
VC = £0.50
FC = £600


We must firstly calculate how much income from each
bunch of flowers can go towards covering the Fixed
Costs.
This is called the Unit Contribution.
Selling Price – Variable Costs = Unit Contribution
£2.00 - £0.50 = £1.50
For every bunch of flowers sold £1.50 can go towards
covering Fixed Costs

10. Break-Even Analysis
Now to calculate how many units must
be sold to cover Total Costs (FC + VC)
SP = £2.00
VC = £0.50
Unit cont =
£1.50
FC = £600
This is called the Break Even Point
Break Even Point =
Fixed Costs Unit Contribution
£600 £1.50 = 400 Units
Therefore 400 bunches of flowers must be sold to
Break Even – at this the point the business is not
making a Profit nor incurring a Loss – it is merely
covering its Total Costs

11. R
O