Business finance costs break even analysis
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Business Finance Costs Break-Even Analysis. Revenue and Costs. “ Revenue ” is income earned by a firm when they sell either the goods it makes or the services it offers. Money received from customers is called sales, sales revenue or turnover .

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Business Finance Costs Break-Even Analysis

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Business finance costs break even analysis

Business Finance

Costs

Break-Even Analysis


Revenue and costs

Revenue and Costs

“Revenue” is income earned by a firm when they sell either the goods it makes or the services it offers. Money received from customers is called sales, sales revenue or turnover.

“Costs” are all the types of expenditure that a firm has when it first starts up and when it is operating on a day-to-day basis.


Revision

Revision …

Costs that do not vary with output are called:

FIXED COSTS

Costs that do vary with output are called:

VARIABLE COSTS

The money a business receives from its customers is called:

REVENUE (OR SALES REVENUE)

To calculate profit, you do the sum: Total revenue minus ?

TOTAL COSTS

The point at which total revenue equals total costs is called:

THE BREAK-EVEN POINT


Fixed and variable costs

Fixed and Variable Costs

Fixed Costs

Costs that DO NOT change when the level of output changes.

Fixed costs stay the same whether a firm is producing 100 units or 1,000 units. Fixed costs still have to be paid even if nothing is produced. eg: rent, rates, insurance, wages, leasing equipment, electricity bill

Variable Costs

Costs that DO change when the level of output changes.

The more that is produced, the more of these items have to be purchased. eg stock and raw materials

Would the item be paid for if nothing was produced?

If yes, it is a FIXED COST


Fixed or variable cost

Fixed or Variable Cost?

Loan repayment to a bank

Fixed Cost

Purchase of CDs and USB sticks

Variable Cost

Insurance for the web design premises

Fixed Cost

Wages

Fixed Cost

Purchase of paper to print invoices to customers

Variable Cost


Business finance costs break even analysis

Constructing a Break-Even Chart

Sales

revenue

£

Profit if we hit

our sales target

Total

Costs

Break-even

Point

Fixed

Costs

Margin of Safety

Output


Business finance costs break even analysis

Break-even Table: based on a price of £200

800

800

800

800

800

0

400

800

1200

1600

800

1200

1600

2000

2400

0

800

1600

2400

3200

Fixed costs are £800, the variable cost per unit is £100


Business finance costs break even analysis

Break-Even Chart: Price £200

£

Revenue

Sales

revenue

3200

2800

Total

Costs

2400

Break even

Point =

8 units

2000

Break-even

Point

Profit if we sell

12 units = £400

1600

1200

Loss if we only

sell 4 units = £400

Fixed

Costs

800

400

4

8

12

16

Number of units


Business finance costs break even analysis

Break-even Table: based on a price of £100

200

200

200

200

200

0

100

200

300

400

200

300

400

500

600

0

200

400

600

800

Fixed costs are £200, the variable cost per unit is £50


Business finance costs break even analysis

Break-Even Chart: Price £50

£

Revenue

Sales

revenue

800

700

Total

Costs

600

500

Break-even

Point

Profit if we sell

6 units = £100

400

300

Loss if we only

sell 2 units = £100

Fixed

Costs

200

100

2

4

6

8

Number of units


Business finance costs break even analysis

Calculating the break-even point without a graph

To calculate how many products we need to sell in order to break even and cover our costs.

Formula:

Fixed Costs

Contribution (Price – Variable cost)


Use the break even formula to work out the break even point for questions 1 5 below

Use the break-even formula to work out the break-even point for questions 1-5 below

Formula:

Fixed Costs

Contribution (Price – Variable cost)

  • Fixed cost = £20,000, price = £4,000, variable cost = £2,000

    2.Fixed cost = £10,000, price = £4,000, variable cost = £2,000

    3.Fixed cost = £26,000, price = £5,000, variable cost = £3,000

    4.Fixed cost = £50,000, price = £20,000, variable cost = £10,000

    5.Fixed cost = £1,000, price = £800, variable cost = £300

20,000 / 2,000 = 10

10,000 / 2,000 = 5

26,000 / 2,000 = 13

50,000 / 10,000 = 5

1,000 / 500 = 2


Using the break even formula

Using the Break Even Formula

Fixed Costs

Price – Variable Cost

  • Fixed cost = £600, price = £400, variable cost = £100

    2.Fixed cost = £10, price = £3, variable cost = £1

    3.Fixed cost = £260, price = £50, variable cost = £30

    4.Fixed cost = £50,000, price = £4,000, variable cost = £2,000

    5.Fixed cost = £1,000, price = £400, variable cost = £200

600 / 300 = 2

10 / 2 = 5

260 / 20 = 13

50,000 / 2,000 = 25

1,000 / 200 = 5


Finance terms

Finance Terms

Variable Cost

Fixed Cost

Total Costs

Sales Revenue

Break Even Point


Business finance costs break even analysis

Break-even Table: based on a price of £100

500

500

500

500

500

0

250

500

750

1000

500

750

1000

1250

1500

0

500

1000

1500

2000

Fixed costs are £500, the variable cost per unit is £50


Business finance costs break even analysis

Break-Even Chart: Price £50

£

Revenue

Sales

revenue

2000

Total

Costs

1500

Break-even

Point

Profit if we sell

15 units = £250

1000

Loss if we only

sell 5 units = £250

Fixed

Costs

500

5

10

15

20

Number of units


Business finance costs break even analysis

Using the Break Even Formula

Fixed Costs

Price – Variable Cost

  • Fixed cost = £600, price = £400, variable cost = £100

    2.Fixed cost = £10, price = £3, variable cost = £1

    3.Fixed cost = £260, price = £50, variable cost = £30

    4.Fixed cost = £50,000, price = £4,000, variable cost = £2,000

    5.Fixed cost = £1,000, price = £400, variable cost = £200

600 / 300 = 2

10 / 2 = 5

260 / 20 = 13

50,000 / 2,000 = 25

1,000 / 200 = 5


Effect on the bep if costs or revenue change

Effect on the BEP if costs or revenue change

If fixed costs or variable costs increase, the BEP will increase – the firm will have to sell more products to cover their costs.

If the selling price is increased, the BEP will decrease – the total revenue will increase so the firm can sell less products to cover their costs.


How a firm can improve the bep

How a firm can improve the BEP

  • Increase the price of the product. The firm will receive more revenue and will have to sell less products in order to break even.

    2.Decrease the fixed or variable costs. The total costs will then be lower so the firm will have to sell less products in order to break even.


Break even exam example

Break Even: Exam Example

A café has fixed costs of £5,000 per month. The variable costs are £5 per item and the selling price is £10.

  • What is the BEP?3 marks

  • £5,000 / £5=1,000

    2.If the fixed costs rose to £6,000, what would be the effect on the break even point for the firm?3 marks

  • BEP would be higher – have to sell more products in order to break even

  • BEP would be 1,200 (£6,000 / £5 = 1,200)

  • If the fixed costs stayed at £5,000 but the variable cost rose to £6 per item, what would be the effect for the firm?3 marks

  • BEP would be higher – have to sell more products in order to break even

  • BEP would be 1,250 (£5,000 / £4 = 1250)

  • If the fixed and variable costs stayed the same and the price rose to £15 per item, what would be the effect on the firm?3 marks

  • BEP would be lower – have to sell less in order to break even

  • BEP would be 500 (£5,000 / 10 = 500)


Examination question

Examination Question

WDP Ltd has fixed costs of £2,000 per month. They sell professional websites for £1,000 and their variable cost per website is £500.

  • How many websites must they sell each month to break even?Show your calculations

  • If the fixed costs rose to £2,500 per month, what would be the effect on the break even point?

    Explain in words and show your calculations

  • Presuming that the fixed costs remained at £2,000 and the variable costs remained at £500, explain how WDP Ltd could lower their break even point.

    Explain in words and give an example


Business finance costs break even analysis

Pass the Buck:

I will give you a topic. In turn, each member of your team must write down TWO things about the topic. Fold the paper over and pass the paper to the next person in your team – they then write down TWO things. You get a point for every different issue you write down.


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