Understand the meaning of the term break even

To be calculate the breakeven point

To be able to produce breakeven charts

Define Breakeven Analysis

Theory behind it

What it can be used for

Breakeven formula

Example

Problem

Conclusion

Breakeven Analysis- A decision-making aid that enables a

manager to determine whether a particular volume of sales will result in losses or profits

Made up of four basic concepts

◦ Fixed costs- costs that do not change

◦ Variable costs- costs that rise in proportion to

sales

◦ Revenue- the total income received

◦ Profit- the money you have after subtracting fixed

and variable cost from revenue

There are two types of costs: Variable costs increase by a step every time

an extra product is sold – energy, labour, materials(eg cost of ice cream cornets in ice cream shop)

Fixed costs have to be paid even if no products are sold rent, business rates, interest on loans, insurance, staff costs e.g. security

eg rent of ice cream shopExamples from your work area?

Variable + fixed costs = total costs When total costs = sales revenue, this is

called the break-even point, eg◦ total costs = £5,000◦ total sales revenue = £5,000

At this point the business isn’t making a profit or a loss – it is simply breaking even.

Businesses must make a profit to survive To make a profit, income must be higher

than expenditure (or costs)

Income £50,000 Costs £40,000

Profit £10,000

Income £50,000 Costs £60,000

Loss £10,000

The break-even point =

Fixed costs

(Selling price per unit minus variable cost per unit)

X = F

P - V

Tom can hire an ice-cream van for an afternoon at a summer fete. The van hire will be £100 (fixed costs) and the cost of cornets, ice cream etc will 50p (variable costs) per ice cream.Tom thinks a sensible selling price will be £1.50.At this price, how many ice-creams must he sell to cover his costs?Calculating this will help Tom to decide if the idea is worthwhile.

Fixed costs

(Selling price per unit minus variable cost per unit)

Tom: £100

(£1.50 – 50p)= 100

Lets say you own a business selling burgers

It costs £1.00 to make one burgerThat’s your V or Variable cost

You sell each burger for £2.80That’s your P or price per unit

Your cost for rent, utilities, overhead, etc... is £100,000 per month

That's your F or fixed cost

V = £1.00 P = £2.80 F = £100,000

X = F /( P – V)X = 100,000 / ( 2.80 - 1 )X = 100,000 / ( 1.80 )

X = 55,555To breakeven you would need to sell 55,555 burgers

You own a lemonade stand

It costs you £0.05 to make cup of lemonade

You sell your lemonade for £0.25

It cost you £50.00 to make the stand

How many cups of lemonade do you have to sell to breakeven?

X = F /( P – V)X = 50 / ( .25 - .05 )X = 50/ ( .20 )

X =250

You would need to sell 250 cups of lemonade to breakeven.

Tom can hire an ice-cream van for an afternoon at a summer fete. The van hire will be £100 and the cost of cornets, ice cream etc will 50p per ice cream.

Tom thinks a sensible selling price will be £1.50.

At this price, how many ice-creams must he sell to cover his costs?

Tom's ice creams

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Tom's ice creams

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Fixed Cost

Tom's ice creams

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Number sold

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Total Cost

Fixed Cost

Tom's ice creams

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Number sold

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Sales Revenue

Total Cost

Fixed Cost

Tom's ice creams

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0 100 200 300

Number sold

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Sales Revenue

Total Cost

Fixed Cost

Loss

Profit

Break-even point

Monthly expenses- use it to see if your income is more then your expenses

Determine minimum price product can be sold for

Determine optimum price product can be sold for

Calculate effects of marketing programmes on price

A Breakeven Analysis is a simple tool to determine if you have priced your product correctly

A Breakeven Analysis helps you calculate how much you need to sell before you begin to make a profit.

You can also see how fixed costs, price, volume, and other factors affect your net profit.

Using the data provided on excel – BEP sheet

- Calculate the breakeven point

- Draw a breakeven chart