BREAK EVEN ANALYSIS

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Importance of Planning and Control Businesses must cover costs or they will make a

loss Some new businesses will aim to only cover

costs or break-even (ie not make a loss) in the first few years - to get established

Profit is the amount made after costs are paid. Forecasting income and costs allows businesses

to make decisions and plans eg – get a loan or overdraft in a month where income is low.

COSTS

Before going any further we need to know what the different types of costs are:

All business incur costs - and management accountants are charged with controlling and tracking these costs.

FIXED COSTS

These costs do not change as output changes.

Eg rent is always £3,000 pa - the landlord does not increase or decrease the amount depending on how much is being produced.

FIXED COSTS

OTHER EXAMPLES OF FIXED COSTS ARE:

Administration costs Insurance Rates Heating and lighting Salaries

VARIABLE COSTS

These costs do change in line with output. As more is produced these costs will increase.

Eg raw materials, labour costs, power costs

REVENUE

Revenue is the total amount made by selling the product or service

BREAK EVEN POINT

UNITS OF PRODUCTION

FIXED COSTS

VARIABLE COSTS

TOTAL COSTS REVENUE

PROFIT/LOSS

0 14000 0 14000 0 -140001000 14000 8000 22000 12000 -100002000 14000 16000 30000 24000 -60003000 14000 24000 38000 36000 -20004000 14000 32000 46000 48000 20005000 14000 40000 54000 60000 60006000 14000 48000 62000 72000 100007000 14000 56000 70000 84000 140008000 14000 64000 78000 96000 180009000 14000 72000 86000 108000 22000

Break-even is where the total costs and revenue are equal.

DISPLAYING THIS INFORMATION The table looks very busy and for a non-

specialist would be off-putting.

The best way to present the information is in the form of a chart.

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Costs &Revenues (£)

Quantity

SalesRevenue

Fixed Costs

Total Costs

Break-even point

G/C

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The area to the left of BEP shows the losses made at the appropriate levels of salessince Total Cost is greater the Sales Revenue.

The area to the right of BEP shows the profits made at the appropriate levels of salessince Sales Revenue is greater the Total Cost.

Therefore the BE chart allows you to calculate whether a profit or loss will be made at any level of sales.

G/C

Interpreting the chart

Up until break-even point the company is making a loss

After break-even point the company is making a profit

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Chocolate Factory Costs - Fixed or Variable? Rent Chocolate Staff wages Packaging Icing sugar Coffee Electricity Ribbons

Flour Advertising material Insurance Lolly sticks Ice cream Tea Milk Website designer

QUESTIONS

What are fixed costs? What are variable costs? How would you calculate Total costs? What is meant by revenue? How much profit is made at Break-even

point?