Being able to prepare a break-even analysis

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# Being able to prepare a break-even analysis - PowerPoint PPT Presentation

Being able to prepare a break-even analysis. P4 calculate break-even using given data to show the level at which income equals expenditure P5 present the break-even as an annotated graph showing break-even. What is break-even analysis?.

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### Being able to prepare a break-even analysis

P4 calculate break-even using given data to show the level at which income equals expenditure

P5 present the break-even as an annotated graph showing break-even

What is break-even analysis?
• The break-even point is important for businesses since it is the level of output (ie sales) where it starts to make a profit.
• If a business sells more than the break-even point then it makes a profit.
• If it sells less than the break-even point it makes a loss.
• Breakeven analysis means investigating how profit is affected by changes such as moving to a larger shop, finding a cheaper supplier etc. Business do this BEFORE they start to see whether they can ever be profitable.
• Write the definition of “break-even” in your book (page 76)
A bit harder ……
• Remember that:
• VC + FC = TC
• Profit = R – TC
• FC are the same for every level of output

Selling price is £2 per item, variable cost is £1 per item and fixed costs £800 per week.

A bit harder ……
• Remember that:
• VC + FC = TC
• Profit = R – TC
• FC are the same for every level of output
Even harder still …..
• Remember that:
• VC + FC = TC
• Profit = R – TC
• FC are the same for every level of output

A market stall sells DVDs for £5 each. They cost £2 each to buy in and rent for the stall is £90 per week. Complete the table below and use the information to decide on how many DVDs must the market stall sell to make a profit.

Even harder still …..
• Remember that:
• VC + FC = TC
• Profit = R – TC
• FC stay the same

A market stall sells DVDs for £5 each. They cost £2 each to buy in and rent for the stall is £90 per week. Complete the table below and use the information to decide on how many DVDs must the market stall sell to make a profit.

Even harder still …..

A market stall sells DVDs for £5 each. They cost £2 each to buy in and rent for the stall is £90 per week. Complete the table below to find out what the break-even point is.

• Remember that:
• VC + FC = TC
• Profit = R – TC
• FC are the same for every level of output
Showing this on a graph

Use your table to draw the graph on graph paper. Start with Fixed Costs and do one line at a time.

http://www.tutor2u.net/assets/simulations/breakeven_simulator_1.swf

Things to note about the graph
• The Fixed Cost line is flat. Why?
• All the lines are straight. Why?
• The Revenue line is steeper than the Total Cost line. Why?
• The Total Cost line is above and parallel with the Variable Cost line. Why?
• The break-even point is where the Revenue and Total Cost lines meet.
And another things …. Margin of safety

Hopefully businesses will be selling more things than their break-even output. The amount they exceed this by is called the margin of safety. Another way of looking at it is the amount by which sales would have to fall before the break-even point is reached. p77

Now try this …
• Kevin charges £5 to clean a car. His has to pay rent to Tesco of £160 per week and uses £1 worth of materials (soap, wax etc) on each car.
• Create a table showing Kevin’s revenue, variable costs, fixed costs and profit for the following number of cars cleaned in a week:
• 0
• 10
• 20
• 30
• 40
• 50
• Create a graph showing the revenue, variable cost, fixed cost and total cost lines. Table of data
• Show the breakeven point on this graph
• Use your graph to work out what profit or loss Kevin would make if he only cleaned 15 cars in a week. Show your workings.
• Can you think of a quicker way to create your graph. Hint: the number of calculations.
• Look at p77 of your textbook and add the items mentioned to your graph, in the appropriate places.
The quicker method to draw a break-even graph
• Redefest
• Redefest is a music festival in Rochester, Northumberland. It costs £4 per person and there is a capacity of 600 people. There are no variable costs, but there are fixed costs as follows:
• Payments to bands £550
• Hire of sound equipment £300
• Wear and tear on marquees £200
• Insurance £200
• Draw the revenue and total cost (fixed cost) lines on a graph.
• To draw a straight line you just need 2 points on it. So we just need to plot two points on the revenue and total costs lines:
The quicker method to draw a break-even graph
• Redefest
• Redefest is a music festival in Rochester, Northumberland. Tickets are £4 per person and there is a capacity of 600 people. There are no variable costs, but there are fixed costs as follows:
• Payments to bands £550
• Hire of sound equipment £300
• Wear and tear on marquees £200
• Insurance £200
• Draw the revenue and total cost (fixed cost) lines on a graph.
• To draw a straight line you just need 2 points on it. So we just need to plot two points on the revenue and total costs lines:

This means a lot less work!

Now try this …

A much bigger festival can accommodate 5,000. They charge £125 admission for the weekend. The organisers have to pay £20 per person to the police to cover security and have the following fixed costs:

Complete this table and then use it to plot the lines:

What is the break-even output?

P4 calculate break-even using given data to show the level at which income equals expenditure

This method is even quicker and doesn’t need a graph to work out the break-even point

Sales level needed to break-even = total fixed costs/ (selling price-variable cost)

Eg Using the pervious example:

Number of festival-goers needed to break-even = £160,000/ (£125-£20)

=1,524 people

Work out the answers for the following:

The total costs have now been reduced to £150,000

The selling price has been raised to £150

The police now charge £40 per person

Describe what has happened to the break-even point in each case.

P4 calculate break-even using given data to show the level at which income equals expenditure

This method is even quicker and doesn’t need a graph to work out the break-even point

Sales level needed to break-even = total fixed costs/ (selling price-variable cost)

Eg Using the pervious example:

Number of festival-goers needed to break-even = £160,000/ (£125-£20)

=1,524 people

Work out the answers for the following:

The total costs have now been reduced to £150,000 1,429

The selling price has been raised to £150 1,231

The police now charge £40 per person 1,882

Making these changes is what you would do if you were testing for new situations: “what if …”.