lesson 6. topics covered business costs revenue profit expenditure break even analysis budgeting...

LESSON 6

Topics Covered

• Business Costs• Revenue• Profit• Expenditure• Break Even Analysis• Budgeting• Cash Flow Forecast• Profit & Loss• Balance Sheet• Maximising Profits

Brain Teaser!

How many words can you find in the business term:

‘Break–Even’

= 5mins

UNIT TITLE: Unit 2:Finance for BusinessLESSON TITLE: Break-even AnalysisLEARNING AIM: B

COMPETENCY FOCUS:

Key Skills (L5): you will be able to develop your numeracy skills to calculate financial transactions of a business and to interpret financial data.

Learning ObjectivesBy the end of the lesson, you should be able to…

LO1) To define the term break even

LO2) To describe why a business might carry out break even analysis

Key terms from last lesson!

• Firms spend money making their products. These are called costs.

• Variable costs = Change depending on output.

• Fixed costs = remain the same no matter how much is produced.

• Total Costs = Fixed Costs + Variable Costs.

• Firms get money from selling their products. This is called sales revenue.

• Total Revenue = Price Per Unit x Sales.

Introduction to Break Even

“A business breaks even if it doesn’t make a profit or a loss”

It is the point at which the business makes just enough revenue to cover their costs.

In other words PROFIT = 0

Businesses must make a profit to survive.

Introduction to Break Even

• To make a profit, revenue must be higher than costs.

• It is where Costs = Revenue within a business.

• New businesses should always conduct a break-even analysis to find the break-even point. This tells them how much they need to sell to break even.

Is the business breaking even?

CoolMobile Ltd makes fun cases for mobile phones.

Each case sells for £6.

Fixed costs per year are £10,000 and variable costs are £2 per case (unit). The maximum cases that the company can make in 1 year is 6000.

Use this data to construct a clear table.

Is the business breaking even?

Units of Output (Cases)

Fixed Costs (£)

Variable Costs (£)

Total Costs (£)

Total Revenue

(£)

Profit or loss?

0

500

1,000

1,500

2,000

6,000

Test your knowledge…

1) What does the term break-even mean? [2]

2) Why is it important for a business to calculate their break-even? [2]

3) What does break-even analysis show a business? [1]

[Max 5marks]

LESSON 7

Topics Covered

• Business Costs• Revenue• Profit• Expenditure• Break Even Analysis• Budgeting• Cash Flow Forecast• Profit & Loss• Balance Sheet• Maximising Profits

Let’s Re-cap!

“A business breaks even if it doesn’t make a profit or a loss”

It is the point at which the business makes just enough revenue to cover their costs.

In other words PROFIT = 0

Businesses must make a profit to survive.

Let’s Re-cap!

• To make a profit, revenue must be higher than costs.

• It is where Costs = Revenue within a business.

• New businesses should always conduct a break-even analysis to find the break-even point. This tells them how much they need to sell to break even.

Numeracy Task

Rounding Numbers

Round 23745 to the nearest thousand.

First, look at the digit in the thousands place. It is 3. This means the number lies between 23000 and 24000. Look at the digit to the right of the 3. It is 7. That means 23745 is closer to 24000 than 23000.

Remember

The rule is, if the next digit is: 5 or more, we 'round up'. 4 or less, it stays as it is.

23745 to the nearest thousand = 24000.

23745 to the nearest hundred = 23700.

Numeracy Task

Rounding & Estimating

Now you have a go…

1)What is 23745 rounded to the nearest ten?2)A company made profit last year of £7,821. What is this figure to the nearest £10?3)A theme park had 9,462 visitors last year. Round this figure to the nearest 10 visitors.4)The distance from London to Glasgow is 418 miles. Round this to the nearest 10 miles.

UNIT TITLE: Unit 2:Finance for BusinessLESSON TITLE: Break-even Analysis (Formula)LEARNING AIM: B

COMPETENCY FOCUS:

Key Skills (L5): you will be able to develop your numeracy skills to calculate financial transactions of a business and to interpret financial data.

Learning ObjectivesBy the end of the lesson, you should be able to…

To calculate break even using the correct formulae (Gui-Reg)

Where is the Break-even Point (BEP)?

Calculating Break-Even Point (BEP)

• There are two ways to calculate the break-even point (BEP):

– USING A FORMULA (CONTRIBUTION METHOD)

– PRODUCING A BREAK EVEN CHART.

BREAK-EVEN POINT (BEP)= the point at

which revenue equals expenditure!

CONTRIBUTION METHOD (FORMULA)

This involves a two part calculation:

• Selling Price per unit – Variable Cost Per Unit = Contribution (Towards Fixed Costs).

AND• Fixed Costs / Contribution = Break-even Point.

AN EXAMPLE

If Fixed Costs = £2000, Variable Costs = £8 Per Unit, Selling Price Per Unit =£10. Then Break-even would be:

Price Per Unit – Variable Cost Per Unit = Contribution (Towards Fixed Costs).£10 - £8 = £2 (Contribution Towards Fixed Costs)

Fixed Costs / Contribution = Break-even Point.£2000 / 2 = 1000

1000 products will need to be sold in order to break-even and cover all their costs.

TASK 1

• Harry sets up a business to print T-shirts. The fixed costs of premises and the T-shirt printers are £3000. The variable costs per T-shirt (the T-shirt, ink, wages) are £5. Each printed T-shirt sells for £25.

NOW YOU TRY!

ANSWER

Harry sets up a business to print T-shirts. The fixed costs of premises and the T-shirt printers are £3000. The variable costs per T-shirt (the T-shirt, ink, wages) are £5. Each printed T-shirt sells for £25.

Price Per Unit – Variable Cost Per Unit = Contribution (Towards Fixed Costs).£25 - £5 = £20 (Contribution Towards Fixed Costs)

Fixed Costs / Contribution = Break-even Point.£3000 / 20 = 150

150 T-shirts will need to be sold in order to break-even and cover all their costs.

LET’S TRY AGAIN!

• A business making and selling Hoovers has the following costs:

Fixed Costs £50,000 per year

Variable Costs £3.70 per t-shirt

Selling Price £12 each

Calculate the break-even point?

ANSWER…

Price Per Unit – Variable Cost Per Unit = Contribution (Towards Fixed Costs).£12 - £3.70 = £8.30 (Contribution Towards Fixed Costs)

Fixed Costs / Contribution = Break-even Point.£50,000 / 8.30 = 6,024

6,024 Hoovers will need to be sold in order to break-even and cover all their costs.

TASK 2

Produce an instruction booklet that teaches a local business owner how to calculate their break-even.

[This will form part of your revision notes!]

LESSON 8

Topics Covered

• Business Costs• Revenue• Profit• Expenditure• Break Even Analysis• Budgeting• Cash Flow Forecast• Profit & Loss• Balance Sheet• Maximising Profits

Let’s Re-cap!

What is the formula (contribution method) for calculating break-even?

Let’s Re-cap!

TASK:

Claire’s Chocolates makes handmade chocolates. Each chocolate sells for 80p and has variable costs of 20p. The fixed costs of the business are £18,000.

How many chocolates does Claire need to sell to break even?

Calculating Break-Even Point (BEP)

• There are two ways to calculate the break-even point (BEP):

– USING A FORMULA (CONTRIBUTION METHOD)

– PRODUCING A BREAK EVEN CHART.

BREAK-EVEN POINT (BEP)= the point at

which revenue equals expenditure!

CALUCULATING BREAK-EVEN POINT USING GRAPH

Break-even graphs show costs and revenue plotted against outputOutput goes on the horizontal axis (starting from 0)Costs and revenue both go on the vertical axis

STEP 1: draw you axis, label ‘y’ axis ‘costs/revenue’ & label ‘x’ axis with ‘No of units sold’

STEP 2: Draw your fixed costs line

STEP 3: Add your total costs line (calculate the total costs for two points on graph & draw best-fit line)

CALUCULATING BREAK-EVEN POINT USING GRAPH

STEP 4: Draw your sales revenue line (again calculate this for two points on graph and draw in best-fit line)

STEP 5: Draw & label your BE point where your total costs and sales revenue lines

cross over.

Key Words

Margin of Safety: The amount by which demand can fall before a business makes a loss.

Task - Evans Cricket Bats Ltd

Fixed costs = £40,000 Variable costs £2 per cricket bat Total costs = Fixed + variable costs Sales revenue = Selling price x output Cricket bats sold for £35 each

Output (No of cricket bats)

Fixed costs

Variable costs

Total costs Sales revenue

1,000 £40,000

2,000 £40,000

3,000 £100,000

4,000 £140,000

Stage 1: calculating costs & revenue

Fixed costs = £40,000 Variable costs £2 per cricket bat Total costs = Fixed + variable costs Sales revenue = Selling price x output Cricket bats sold for £35 each

Output (No of cricket bats)

Fixed costs

Variable costs

Total costs Sales revenue

1,000 £40,000 £20,000 £60,000 £35,000

2,000 £40,000 £40,000 £80,000 £70,000

3,000 £40,000 £60,000 £100,000 £105,000

4,000 £40,000 £80,000 £120,000 £140,000

Stage 2: DRAW the graph

Turn your paper so it is LANDSCAPE and copy this.C

osts

(£)

Output (No of cricket bats)

1000 2000 3000 4000

Stage 3: Showing costs on a graph.

Insert fixed costs.

Cos

ts (

£)

Output (No of cricket bats)

1000 2000 3000 4000

Stage 3: Showing costs on a graph.

Calculate total costs.

Cos

ts (

£)

Output (No of cricket bats)

1000 2000 3000 4000

Total costs

Variable costs

Fixed costs

Stage 4: Showing revenue on a graph

Now add revenue to your graph.

Cos

ts (

£)

Output (No of cricket bats)

1000 2000 3000 4000

Total costs

Variable costs

Fixed costs

Stage 4: Showing revenue on a graph

Now add revenue to your graph....

Cos

ts a

nd s

ales

re

venu

e (£

)

Output (No of cricket bats)

1000 2000 3000 4000

Sales revenue

Total costs

Variable costs

Fixed costs

Stage 5: revealing the break-even pointBreak-even is point is where revenue line

crosses the total costs line.

Cos

ts a

nd s

ales

re

venu

e (£

)

Output (No of cricket bats)

1000 2000 3000 4000

Sales revenue

Total costs

Variable costs

Fixed costs

Is the business breaking even?

CoolMobile Ltd makes fun cases for mobile phones.

Each case sells for £6.

Fixed costs per year are £10,000 and variable costs are £2 per case (unit). The maximum cases that the company can make in 1 year is 6000.

Use this data to construct a clear table.

Is the business breaking even?

Units of Output (Cases)

Fixed Costs (£)

Variable Costs (£)

Total Costs (£)

Total Revenue

(£)

Profit or loss?

0

500

1,000

1,500

2,000

6,000

Is the business breaking even?

Use your table to construct a break-even graph.

This can be done using graph paper.

TASK 1

Complete task on pg.68/69.

TASK 2

Complete activities in the break-even workbook.

[40mins]

The Importance of Break-even

- Helps a business make decisions about the business

- Calculate the effect of a change in price

- Calculates the effect of a change in costs

- Estimates the level of output needed to cover costs

- Provides evidence to the bank when applying for a loan.

The Limitations of Break-even

It assumes that the firm can sell any quantity of the product at the current price. In practice the firm may need to reduce prices to sell at high levels of output.

It assumes fixed costs never change - but as output increases the firm may need to buy more machines, get bigger premises, take on extra sales and administration staff.

It assumes that all products are sold. This doesn’t always happen; some products may only be sold at

lower prices or need to be thrown away.

TASK 3

Complete GCSE Bitesize Testbite

http://www.bbc.co.uk/schools/gcsebitesize/business/finance/profitability/quiz/q79001145/