Break Even Lesson Objectives Understand the meaning of

Break Even

Lesson Objectives ¡ ¡ Understand the meaning of break even. Ability to calculate break even point using the contribution method.

Key terms from last lesson: Total Variable costs = variable costs x output level. ¡ Total costs = Fixed costs + variable costs. ¡ Total revenue = price per unit x sales. ¡

What is break even? “A business breaks even if it doesn’t make a profit or a loss” ¡ ¡ It is the point at which the business makes just enough revenue to cover their costs. In other words profit = 0 Businesses must make a profit to survive. To make a profit, revenue must be higher than costs.

Calculating the break even point ¡ There are two ways to calculate the break even point. The two ways are as follows: - The CONTRIBUTION METHOD. - PRODUCING A BREAK EVEN CHART.

The Contribution Method This involves a two part calculation: Selling Price per unit – variable cost per unit = contribution (towards fixed costs). AND ¡ Fixed costs divided by contribution = Break even point. ¡

Contribution Method - Example ¡ If fixed costs = $2000, variable costs = $8 per unit, Selling price per unit = $10. Then break even would be: Price per unit – variable cost per unit = contribution (towards fixed costs). $10 - $8= $2 (Contribution towards fixed costs) Fixed costs divided by contribution = Break even point. $2000 divided by 2 = 1000 products will need to be sold in order to break even and cover all their costs.

Task – Using the information from the previous slide answer the following questions. Would the business be in a profit or loss situation if they sold 1001 units? ¡ What would the business in a profit or loss situation if they sold 999 units? ¡ How much profit will the business make if they sell 1001 units? ¡

Task – Calculate the following the break even points using the contribution method [1] Fixed costs Selling Price Variable Cost [2] A business Rent Rates Salaries Selling price Raw materials $4000 $400 $200 has the following costs: $200 per month $30 per month $450 per month $9 $7

Task ¡ A business making t-shirts has the following costs: Fixed Costs $50, 000 per year Variable Costs 3. 70 per t-shirt Selling Price $12 each [a] Calculate the break-even point? [b] What would be the revenue as breakeven?