break – even recap
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BREAK – EVEN ANALYSES
MR AHERN
Learning Objectives
1. Recap Variable and fixed costs.2. Recap break even charts.3. Produce break even chart.4. Analyses break even charts.
Recap
Fixed or variable
Insurance
Electric
Workers
Telephone
Raw Materials
Accountant
Variable and fixed costs
Variable costs
Variable costs change directly with output
Variable costs can be reduced by reducing waste, finding cheaper suppliers or streamlining the production process
Variable costs
Raw materials Packaging This could be the price of Ink for
packaging Or fabric to produce a T-shirt Fuel in a taxi Meat in a burger
Fixed costs
Fixed costs do not change with output
Could be Rent Rates Salaries Accountancy costs Most marketing costs Leasing equipment costs
Learning Objectives
1. Recap Variable and fixed costs.
2. Recap break even charts.3. Produce break even chart.4. Analyses break even charts.
What is Break - even?
It is the point at which a company is not making a loss or a profit.
The business income equals its expenditures.
It is a significant marker as it allows management to know the level of output required to sustain and succeed.
It is where Costs = Revenue within a business.
Always measured in production units never cost
Terms to be familiar with
Variable costs - changes depending on output.
Fixed costs (fixed overheads) - remains the same no mater how much is produced
Total cost = Fixed cost + variable costs
Profit Loss
Terms to be familiar continued Output Revenue (Sales revenue) = when
firms get money from selling their products / services
Margin of Safety Break – even point
Revenue
Revenue is the amount of capital (money) brought in by the firm form sales of goods or services.
Revenue is calculated before any expenses are deducted.
If a firm sold 10 T-shirts at £15 within a specific timeframe (say a month) total revenue for that month would be £150
What is Break – even analysis? used by production and management
accountants. It is based on categorising
production costs between those which are variable (costs that change when the production output changes)
and those that are fixed (costs not directly related to the volume of production).
Break – even chartA break-even chart can demonstrate
the effects of change in price of products / services
Units produced
Fixed cost Variable cost
Total cost
0 15,000 0 15,00
1 15,000 20 15,020
50 15,000 1,000 16,000
100 15,000 2,000 17,000
150 15,000 3,000 18,000
200 15,000 4,000 19,000
250 15,000 5,000 20,000
Break – even chart Fixed costs = £1200 Variable costs per unit £10 To calculate variable costs for 50
units, simply multiply VC x 50 .
Units produced
Fixed cost Variable cost
Total cost
0 12,000 0 12,00
1 12,000 10 12,010
50 12,000 1,000 12,500
100 12,000 2,000 13,000
150 12,000 3,000 13,500
200 12,000 4,000 14,000
250 12,000 5,000 14,500
Break – even chart Fixed costs = £50,000 Variable costs per unit £200 To calculate variable costs for 50
units, simply multiply VC x 50 .
Units produced
Fixed cost Variable cost
Total cost
0 50,000
1
50
100
150
200
250
Break – even chart Fixed costs = £50,000 Variable costs per unit £200 To calculate variable costs for 50
units, simply multiply VC x 50 .
Units produced
Fixed cost Variable cost
Total cost
0 50,000 0 50,000
1 50,000 200 50,200
50 50,000 10,000 60,000
100 50,000 20,000 70,000
150 50,000 30,000 80,000
200 50,000 40,000 90,000
250 50,000 50,000 100,000
T.R.
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Costs
Production
Fixed Cost
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Costs
Production
Fixed Cost
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Costs
Production
Fixed Cost
Total Cost
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Costs
Production
Fixed Cost
Total Cost
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Costs
Production
Fixed Cost
Total Cost
Total Revenue
T.R.&
Costs
Production
Fixed Cost
Total Cost
Total Revenue
T.R.&
Costs
Production
Fixed Cost
Total Cost
Total Revenue
Break - even Point
T.R.&
Costs
Production
Fixed Cost
Total Cost
Total Revenue
Break - even Point
Margin of safety
Area of profit
Margin of safety
The total current output and total revenue.
Shows output at a point on the total revenue line.
The difference between current output and the break – even point is the margin of safety.
MOS indicates the reduction in products and services a company can stand before they start making a loss.
Learning Objectives
1. Recap Variable and fixed costs.
2. Recap break even charts.3. Produce break even chart.4. Analyses break even charts.
Start of chart Start by compiling a simple grid to
calculate total costs at certain quantities of production, plotting your chart is made a lot easier.
Units produced
Fixed cost Variable cost
Total cost FC+VC
Task for graph paper
1. Lucy is selling 15mp digital cameras on a market stall. The cameras cost her £20 she sells them at £50.00. Her market stall rent is £300 for the week. Using the graph paper provided make a break-even chart to determine how many Cameras Lucy will have to sell in a week to break-even?
2. Lucy’s suppliers have offered her a new 18mp camera to sell instead. They cost Lucy £30 each but she sells them at £ 50 Using the same chart calculate how many items she will need to sell to break-even in a week?
Lucy’s Break-Even
T.R.&
Costs
Units Sold
Lucy’s Break-Even
T.R.&
Costs
Units Sold
Lucy’s Break-Even
T.R.&
Costs
Units Sold
Lucy’s Break-Even
T.R.&
Costs
Units Sold
Learning Objectives
1. Recap Variable and fixed costs.2. Recap break even charts.3. Produce break even chart.4. Analyses break even charts.
Why would Lucy chose to sell the 18mp camera at the same price as the 15mp one?
Analyzing Break Even
In your books write down 3 different reasons why break even analysis is a useful tool for businesses to use
Can anybody think of any limitations of break even analysis?
The limitations of Break Even Analysis Break even is used to help set prices
and determine how many need to be sold at a given price.
It does not account for Fall in customer demand Reduction in price Rise in overheads
Well done for today
We got through a lot quickly