Learning intention l Understand the concept of Breakeven

Learning intention l. Understand the concept of Break-even and the assumptions on which it is based

Lesson Objectives p p p Define and explain the key terms Calculate breakeven using a formula Construct a breakeven chart Calculate profit and loss from a breakeven chart Identify and discuss the importance of the margin of safety Evaluate the strengths and weaknesses of using breakeven analysis

Break even ~ a definition p This is the point at which a company sells enough products to cover its costs p At this point it is neither making a profit nor a loss – it is simply ‘surviving’ p It is a firms First target p Anything beyond this will make a profit for the company p Break-even analysis compares a firms revenue with its fixed and variable costs to identify the minimum sales level to make a profit

To determine the break-even point p This can be worked out either by using a formula OR by Chart p Break-even Point = Fixed Costs Contribution per unit* So, if you knew that your fixed costs were £ 600 and that your contribution per unit was £ 6. 00 Breakeven = £ 600 £ 6. 00 = 100 Units ( i. e. The number of units (products) you would have to sell before you covered your costs). *(SR-VC)

Activity one Harry sets up a business to print T-shirts. The total fixed costs for the premises are £ 2150 along with the T-shirt printing machinery of £ 850. The variable costs per T-shirt are £ 1. 45 p for the material , for the ink £ 0. 85 p and wages for piecemeal production £ 2. 70 p. If each printed T-shirt sells for £ 25 …. . Calculate 1) The contribution per unit 2) The break-even point

This information may be shown graphically p Have a look at this excel chart ….

Chart showing the major features of Breakeven for Harry’s T-shirts The point where the total cost line Crosses the revenue line is the BREAK EVEN POINT ie 150 units would have to be sold to cover both the fixed and variable (total)costs

Supposing Harry actually sold 250 T-shirts Actual Output Margin of safety If harry sells 250 T-shirts - 150 (his breakeven point ) he will have 100 units profit ~ or margin of safety

Activity Two Draw a break even chart to show the position of a firm with : a) A maximum capacity of 1, 000 units Fixed costs of £ 6000 Selling price of £ 17. 00 Variable costs of £ 5. 00 per unit b) State what the breakeven point is. c) Show on the graph, and state, the profit or loss made at sales of 400 units d) Indicate on the graph , and state, the safety margin at that level of output e) If the selling price were £ 25. 00 what would be the break-even point Answer

What do you think are the Advantages & Disadvantages of break-even analysis? Advantages Easy to do Disadvantages Assumes that variable costs always rise steadily ( not always the case) Enables forecasting Its ok to use for a single product but Not so good if there a range of different products Can be used to persuade banks to lend firms money If you put the wrong data in you get the wrong data out Quick Assumes all the production (units) are sold (how about wastage ? ) Only tells you how many units you have to sell to break even NOT what your actual Sales are going to be

Plenary ~ Practice Questions p Write down the formula for contribution p Write down the formula for Break –Even p Why might a business wish to calculate its margin of safety ?