Costs and Break Even

Michelle Hopkinson

Identify different types of costs for a given business scenario

Discuss how costs impact on profit and sales Correctly calculate break even points for business

scenarios

In addition some more able learners may be able In addition some more able learners may be able to:to:

Analyse the impact of costs on the financial performance of a business

Variable Costs VC expenses that change depending on output (ie sales)Eg. Raw materials, packaging, utilities, wages

Fixed Costs FC expenses that do not change, irrespective of output. These are linked to time rather than on the level of business activityEg. Rent, insurance, salaries

A business deducts REVENUE from TOTAL COSTS to determine profit

Fixed costs are ‘spread’ across how many units are sold, so if they sell low numbers, FC must still be paid for from elsewhere

This is why FC are kept low (OR changed to VC such as wages)

A business uses the above (based on how many they think they will sell) to make sure their selling price will pay off all costs

Eg. Selling 1,000 units at £20 each. VC £5, FC £10,000

Revenue £20,000 (1,000 x £20)Costs 15,000 (1,000 x 5 plus 10,000)Profit 5,000

How can a business maximise income?

Increasing the selling price of product Reduce the costs Reduce the price to dramatically increase sales Increasing sales by marketing activity (this

could lead to employing more sales staff, promotional costs)

Break even will help decide if the above are a good idea

In pairs, discuss what you think break even is

Create a definition (one sentence)

The point in a business where costs EQUALS sales This provides a business with it’s first target of covering all

costs Any sales beyond this are profit

For example: Fixed costs are £100,000, variable costs per unit are

£10, selling at £20 per unit BEP = £100,000

(£20 - £10) = 10,000 units to sell

BEP formula: Fixed Costs Contribution (SP-VC)

Open the activity on Moodle called ‘Munchbox’ Calculate the BEP for each scenario

The Margin of Safety (MOS) is the difference between the planned level of sales and the BEP

This helps the business identify the amount of units sales can fall before the business starts to make a loss

Example if the BEP was 10,000 but they felt confident (and had planned) to sell 12,000 the MOS would be 12,000 – 10,000 = 2,000 units

Identify different types of costs for a given business scenario

Discuss how costs impact on profit and sales Correctly calculate break even points for business

scenarios

Questions?

Break even charts Assignment