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Breakeven Point

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Breakeven Point

- When you make a product, you need to know how many you need to make and sell to make money.
- This critical point is known as the Breakeven Point.
- It is where you have sold enough items to break even.
- The bigger the profit margin per item – the less items you need to sell to breakeven.

- Fixed Costs
- These remain the same even though production levels may change.
- Rent, insurance, rates, taxes etc.

- These remain the same even though production levels may change.
- Variable Costs
- These are costs that are linked to production and will change when production levels change.
- Cost of materials, wages, power etc.

- These are costs that are linked to production and will change when production levels change.

- In business you want your income to be larger than your costs – this way you make a profit.

Variable Costs 75+55+25 = $155

Fixed Costs 24000 + 5000 + 75000 = $104,000

Total Income = selling price x number sold

Total Income = 200 x 5000

= $1,000,000

Total Costs = (variable cost per unit x number of units sold) + TFC

Total Costs = (155 x 5000) + 104,000

= 775,000 + 104,000

= $879,000

Profit or Loss ?

Because your income is higher than your total costs – you must have made a profit.

Profit / Loss = total income – total costs

= 1,000,000 – 879,000

= $121,000

- Using this method you can work out the minimum number of items that you need to sell to breakeven.
- You can do it by using formulas and by drawing graphs.
- The graphing method uses GC.

The amount of money you make per unit - i.e. your profit per item

Marginal Income Per Unit = Selling Price per unit– Variable Cost per Unit

MIPU= 200 – 155

= 45

Number required to Break Even = Total Fixed Costs/ MIPU

B/E = 104000/45

=2311.11 – so 2312 Surfboards

- You can also graph these things – giving a better picture of what is going on.
- The book shows how to do it by hand – we will use GC for all the graphing.
- You will need to get used to how to enter the data and then apply this to all questions.

Where the lines cross is the breakeven point

- You need to identify what is being made and call that x. (that’s right algebra!)
- You use the graphing function
- Go to GRAPH and hit exe.
- You will see Y1, Y2 etc.. These are the lines that will be drawn.
- So you need to convert the question into a form that can be entered into the GC.

The number of items being made is x.

These are entered into your calculator as Y1 and Y2

- If you get the calculator to draw this by pushing F6 – you probably wont see anything as the scales need to be set.
- You need to hit SHIFT F3 to set the viewing window. In this case set:
- x min to 0
- X-Max 20000
- Scale 1000
- Y-min 0
- Max 300000
- Scale 1000

- To find the intersection – which tells us the break even number you hit:
- F6 to draw it
- SHIFT G-Solve (F5)
- ISCT – F5
- It will trace the graph and tell you where it intersects – this case it shows x=12000 – which is 12000 items to break even.

- If you are asked to sketch the graph you need to find:
- The intersection as completed on the previous slide.
- Y intercept – G-Solv (F5) and then F4