Starter Part 8 DRAWING BREAKEVEN CHARTS Lesson Objective

Starter

Part 8 DRAWING BREAK-EVEN CHARTS

Lesson Objective �To be able to draw a break-even chart. �To be able to interpret a Break-even chart.

Break-even Charts �We know how to calculate the break-even point, but you can also draw it on a chart! �This involves drawing 3 lines: � The fixed coats line � The total costs line � The total revenue (sales) line �Read through the sheet you have been given. �Highlight 3 questions you have!

What does the Revenue Graph look like? Total Costs/ Revenue Total Revenue £ Quantity

What does the Breakeven chart look like? Total Costs/ Revenue Breakeven Point Total Revenue Total Costs £ Quantity

What does the Breakeven chart look like? Total Costs/ Revenue Breakeven Point Total Revenue Profit Total Costs Loss £ 50 Units Quantity 100 Units 150 Units

Margin of Safety �This is the difference between the break-even point and the current level of output. �If we produce 100 cakes the margin of safety would be: Production – Breakeven = Margin of safety � 100 – 25 = 75 margin of safety is how much output or sales level can fall before a business reaches its breakeven point.

The Margin of Safety? Total Costs/ Revenue Breakeven Point Total Revenue Profit Total Costs Loss £ Margin of Safety 100 – 150 = 50 50 Units Quantity 100 Units 150 Units

Plotting a Break-even graph STEPS TO FIND OUT THE BREAK-EVEN USING A GRAPH 1. Calculate the companies costs using a simple table 2. Draw the graph 3. Plot fixed costs & Add variable costs to fixed costs to get total costs. Plot it on the graph. 4. Next plot revenue 5. The break-even point is where revenue line crosses the total costs line. Break-even graphs show costs and revenue plotted against output Output goes on the horizontal axis (starting from 0) Costs and revenue both go on the vertical axis

Task - Evans Cricket Bats Ltd Output (No of cricket bats) Fixed costs 1, 000 £ 40, 000 2, 000 3, 000 Variable costs Total costs Sales revenue £ 40, 000 £ 100, 000 4, 000 �Fixed costs = £ 40, 000 �Variable costs £ 20 per cricket bat �Total costs = Fixed + variable costs �Sales revenue = Selling price x output �Cricket bats sold for £ 35 each £ 140, 000

Stage 1: calculating costs & revenue Output (No of cricket bats) Fixed costs Variable costs Total costs Sales revenue 1, 000 £ 40, 000 £ 20, 000 £ 60, 000 £ 35, 000 2, 000 £ 40, 000 £ 80, 000 £ 70, 000 3, 000 £ 40, 000 £ 60, 000 £ 105, 000 4, 000 £ 40, 000 £ 80, 000 £ 120, 000 £ 140, 000 �Fixed costs = £ 40, 000 �Variable costs £ 20 per cricket bat �Total costs = Fixed + variable costs �Sales revenue = Selling price x output �Cricket bats sold for £ 35 each

Stage 2: DRAW the graph To be able to draw a break-even chart. Costs (£) Turn your paper so it is LANDSCAPE and copy this. 1000 2000 3000 4000 Output (No of cricket bats)

Stage 3: Showing costs on a graph. To be able to draw a break-even chart. Costs (£) Insert fixed costs. 1000 2000 3000 Output (No of cricket bats) 4000

Stage 3: Showing costs on a graph. To be able to draw a break-even chart. Calculate total costs. Fixed costs Costs (£) Variable costs Total costs 1000 2000 3000 Output (No of cricket bats) 4000

Stage 4: Showing revenue on a graph To be able to draw a break-even chart. Now add revenue to your graph. Fixed costs Costs (£) Variable costs Total costs 1000 2000 3000 Output (No of cricket bats) 4000

Stage 4: Showing revenue on a graph To be able to draw a break-even chart. Now add revenue to your graph. . Costs and sales revenue (£) Fixed costs Variable costs Total costs 1000 2000 3000 Output (No of cricket bats) 4000 Sales revenue

Stage 5: revealing the breakeven point To be able to draw a break-even chart. Break-even is point is where revenue line crosses the total costs line. Costs and sales revenue (£) Fixed costs Variable costs Total costs 1000 2000 3000 Output (No of cricket bats) 4000 Sales revenue

Break-even limitations �It assumes that the firm can sell any quantity of the product at the current price. In practice the firm may need to reduce prices to sell at high levels of output. �It assumes fixed costs never change - but as output increases the firm may need to buy more machines, get bigger premises, take on extra sales and administration staff. �It assumes that all products are sold. This doesn’t always happen; some products may only be sold at lower prices or need to be thrown away.

And to finish… To be able to interpret a breakeven chart. �On the work sheet, complete the questions… �margin of safety is how much output or sales level can fall before a business reaches its breakeven point.