Calculating BreakEven Explain breakeven point Calculate breakeven point

(Calculating Break-Even) Explain break-even point. Calculate break-even point for a business operation. Pricing LAP 4

Explain break-even point.

Lemons Water Stirrers Sugar Ice Cups Lemonade 50¢ § Breaking Childhoodeven lemonade stand = important for businesses • Who provided your materials? § Must abledid toyou cover costs • Howbe much charge? • Didhopefully—make you break even? a profit! § And

Breaking Even § Art club bake sale • $. 75 per dessert item • $12 in costs § • The club breaks even after selling 16 items. Break-even point = when the club makes enough money to cover costs and begins to make a profit • No loss, no gain • Will earn profit as costs stay the same

§ Businesses reach break-even point when total sales income at a given selling price equals total costs. § Must calculate total costs and estimate sales revenues to project break-even point

Costs Ø Predictable business costs that don't change when sales go up or down such as: • Taxes • Rent or mortgage payments • Equipment payments or leases • Wages and salaries • Depreciation of physical assets • Fees and licenses • Interest on loans • Insurance

Costs Ø Costs that change along with changes in sales volume Ø If sales go up, these costs increase. Ø If sales go down, these costs decrease. • • Shipping Supplies Cost of goods Promotional costs • • Sales tax Raw materials Business travel Sales commissions Components of Break-Even

Costs Semivariable costs Ø Vary to some extent in response to sales Ø Should be assigned as either fixed or variable for the purpose of calculating break-even Components of Break-Even

Sales revenues v Most businesses receive the bulk of their income from sales revenues. v Two ways that sales revenues increase: • As the number of units sold increases • As the selling price per unit increases

Profit and Loss § A business does not make a profit until it has passed the break-even point. § This occurs when total sales revenues are greater than total costs. § A business loses money if it does not reach its break-even point and sales revenues are less than total costs.

ü To determine when the business will begin making a profit ü To help set prices ü To determine whether to relocate the business ü To determine capital needs ü To determine what incentives to offer

Calculate break-even point for a business operation.

• BP—break-even point • FC—total fixed costs • VCM—variable-cost margin • Formula—BP = FC ÷ VCM • Break-even equals total fixed costs divided by the variable-cost margin.

Variable-Cost Margin § The amount that each sale contributes to fixed costs § Also called the fixed-cost contribution § Calculated by subtracting variable costs per unit from the selling price per unit

Step 1—Identify costs and revenues. Step 2—Classify costs as fixed or variable. Step 3—Total the costs in each classification. Step 4—Calculate the variable cost per unit. Step 5—Subtract the variable cost per unit from the selling price per unit to obtain the variable-cost margin. Step 6—Divide the total fixed costs by the variable-cost margin to determine break-even.

§ Using break-even to determine sales commissions § Darius' company • Deciding between 5% and 7% • No written agreements • Is it ethical to change the rate?

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