Learning Objectives

1. Learning Objectives • The meaning of fixed and variable costs. • How to calculate the break-even point using the contribution • method. • How to identify the break-even point by drawing graphs of costs • and revenue.

2. Fixed Costs Fixed costs, also known as overheads. “Fixed costs do not change with output” – for at least 1 year. Rent/Vehicle Lease Salaries Rates Loan Interest

3. Variable Costs Variable costs, “Costs which change with output”. Raw Materials Machine Costs/ Maintenance Shipping/Carriage Costs Wages Heating/Lighting

4. Calculating The Break-Even Point Break-even Analysis is a tool of business which aims to predict at what point the business will have gained enough sales to cover their costs.

5. Methods of Break Even Analysis • There are different ways of calculating the Break Even point of a business. • These include the: • Table Method • Graph Method • Formula Method

6. Calculating The Break-Even Point Table Method The following information is for a firm making toys which are sold at £20. The variable costs are £10 per product and fixed costs are £5000. We are going to follow the step by step process of the table method to calculate the Break Even Point for this product.

7. First we enter the Fixed Costs “fixed costs are £5000”

8. Then we calculate the Variable Costs. The question states that the “The variable costs are £10 per product”. To calculatethe variable cost for 100 units of production we multiply 100 by £10. Therefore the Variable Cost of producing 100 toys is £1000.

9. Now we have all the cost information we can calculate the total costs.TOTAL COSTS = FIXED COSTS + VARIABLE COSTS

10. To calculate the Revenue Column we again look at the question…”making toys which are sold at £20”. REVENUE = SELLING PRICE X No OF UNITS

11. Almost there…..we can now complete the table and find out the Break Even Point. At the Break Even point the firm will not be making a profit or a loss. The amount they have spent will equal the amount they have received from sales. To calculate this use the following formula: PROFIT/LOSS = REVENUE – TOTAL COSTS As you can see from the table this business breaks even when they sell 500 toys and gain £10000 in revenue!

12. Calculating The Break-Even Point Graphical Method We are now going to us the same table to prepare a break-even graph from the following information for a firm making toys which are sold at £20. The variable costs are £10 per product and fixed costs are £5000

13. 16 14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 8 Calculating The Break-Even Point £ (000) TR TC BE FC Q

14. Calculating The Break-Even Point TASK Use the graph to find: The profit made when 650 toys are sold.

15. £ (000) TR 16 14 TC 12 BE 10 8 6 FC 4 2 0 Q 1 2 3 4 5 6 7 8 Calculating The Break-Even Point 1500

16. Calculating The Break-Even Point Formula Method Using the following formula, calculate the break-even point for a firm making toy frogs using the following details: Task 1 Fixed costs are: £1000 per month Selling price per toy frog: £12 Variable costs per toy frog: £7 Total Fixed Costs BREAK-EVEN POINT Selling Price Per Unit Variable Cost Per Unit Answer on next slide………don’t cheat 

17. Calculating The Break-Even Point 1000 200 12 7

18. Calculating The Break-Even Point TASK Calculate the break-even point for a CD using the following figures using a formula method. Task 2 Fixed Costs = £3000 Variable Costs = £4 Selling Price Per Unit = £8 Answer on next slide………don’t cheat 

19. The Mathematical Method Selling Price (SP) = £8 Fixed Costs (FC) = £3000 Variable Costs (VC) = £4 Contribution (C) = SP – VC = £8 - £4 = £4 FC £3000 Break-even 750 C £4 Sales Revenue at Break-even 750 x 8 £6000

20. Calculating The Break-Even Point TASK Calculate the break-even point using the following figures using both a mathematical and then a graphical method. Selling price per unit: £5 Fixed Costs: £500 Variable Costs: £2

21. The Mathematical Method Selling Price (SP) = £30 Fixed Costs (FC) = £6000 Variable Costs (VC) = £10 Contribution (C) = SP – VC = £30 - £10 = £20 Break-Even FC £6000 300 C £20 Sales Revenue at Break-even 300 x 30 £9000

22. 16 14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 8 The Graphical Method TR £ (000) TC BE FC Q