Revenues Costs Profit KEY TERMS Fixed Costs Variable

Revenues, Costs & Profit KEY TERMS Fixed Costs Variable Costs Revenue Profit

Question I buy 20 i. Pod’s for £ 1600 and sell them for £ 79. 99 each Will I make a profit?

Break Even Point • The point at which Total Costs is exactly equal to Total Revenue • What are Costs and Revenues? Come up with a definition for each

Profit? So what is PROFIT?

Understanding Costs and Revenues Cost/Revenue Variable Cost Description Costs which change in direct proportion to sales Fixed Costs which stay the same regardless of how much you sell Total Cost Variable Costs + Fixed Costs Revenue The money which comes into the business from sales

Break Even Analysis

Contribution • Contribution: The amount of money each unit sold contributes to pay for the fixed costs of the business. Contribution = selling price - variable cost per unit – E. g. a product sells for £ 15 and has variable costs per unit of £ 11. Each unit sale therefore makes a contribution of £ 4 towards fixed costs of business. If business had fixed costs of £ 20, 000, then it would need to sell 5, 000 units (£ 4 x 5, 000 = £ 20, 000 contribution) in order to break even

Importance of the Break-even Point • Contribution from every unit sold above breakeven point adds to profit • Breakeven point provides a focus for business • Also helps it work out whether forecast sales will be enough to produce a profit and whether further investment in product is worthwhile. • How calculated Number of units needed to break even is calculated by: FIXED COSTS CONTRIBUTION

Limitations of Break-even Charts • Do not take into account possible changes in costs over time period • Do not allow for changes in selling price • Analysis only as good as quality of information • Do not allow for changes in market conditions in time period – e. g. entry of new competitor

The margin of safety is the number of sales above the break-even point, or the range of output over which a profit can be made. A business can check its margin of safety with the following formula: Margin of safety = Actual output - break-even output Why is it desirable to have a healthy margin of safety?