What do you remember from ‘Cash Flow Forecasting’ …. Test what you’ve learned! Do Now
Transcript
1. Do NowWhat do you remember fromCash Flow Forecasting . Test
what youve learned!
2. Break-Even Analysis
3. Essentials for Break-Even 1st to completeDo you remember
your 5 VIVOSfinance key terms? 3 minutes
4. Learning ObjectivesBy the end of this lesson you should be
able to:1. Understand what is meant by break-even.2. Calculate
contribution per unit of output and total contribution.3. Use
contribution per unit to calculate the break- even level of
output.
5. What is Break-Even Using the following key words construct a
definition for break-even. A firm will break-even when total
revenue Profit Total Costs meets total costs. Once achieved the
firm will have the opportunity to make profit.LO1 Understand what
is meant by break-even.
6. Who wants to know about break- even and why? Think Pair
Share Write down your Walk around the Share your ideas reasons.
room until the with the rest of music stops and the group. share
your ideas. Owners/ shareholders can anticipate when the firm will
begin making profit. Banks/ Lenders - will want to know if that the
firms figures are realistic or secure. Investors want to know the
value or worth of the firm.LO1 Understand what is meant by
break-even.
7. Contribution Contribution is the difference between sales
revenue and variable costs of production. What remains goes towards
paying for fixed costs. Contribution towards paying for fixed costs
Sales Variable Less = Revenue Costs Contribution Less Fixed Costs =
ProfitLO2 Calculate contribution per unit of output and total
contribution.
8. Contribution per unit Contribution = Selling Price of one
unit Variable Cost of producing one unit. Total contribution = Unit
Contribution x No. of Units Sold Profit = Total Contribution Fixed
costs Why do you think that businesses want to break down costs in
this way?LO2 Calculate contribution per unit of output and total
contribution.
9. Contribution per unit Important points to remember about
contribution per unit. It can be increased by raising the selling
price. It can be increased by reducing variable costs. It is not
the same as profit per unit as fixed costs are not subtracted. An
increase in contribution per unit raises the potential profit that
a business can make.LO2 Calculate contribution per unit of output
and total contribution.
10. Calculating the break-even level of output Breaking-even
level of output - this is the level of output or the number of
customers that earn enough revenue to cover costs of production.
Break-even output = Fixed costs Contribution per unit What are the
benefits of planning to reach a LOW break- even point?LO3 Use
contribution per unit to calculate the break-even level of
output.
11. Calculating the break-even level of output. If a printing
business pays fixed costs of 500 per week and each customer earns
the business a contribution of 250, how many customers are needed
to pay for fixed costs and therefore break- even? Break-even output
= Fixed costs Contribution per unit Break-even output = 500 =2
250LO3 Use contribution per unit to calculate the break-even level
of output.
12. Calculating the break-even level of output. Important
points to remember calculating the break-even level of output. If
nothing else changes, a reduction in contribution per customer/
unit will raise the break-even level of output. If output does not
increase then profits will fall. Calculating break-even output is
an easy way of checking the viability of a new business proposal.
If output seems high then an entrepreneur can consider reducing
fixed costs or raising contribution per unit of output.LO3 Use
contribution per unit to calculate the break-even level of
output.
13. Pierres Personal T-shirtsPierre believes that his
break-even output may be toohigh. With reference to the case study,
what would bethe best approaches for him to use in order to
reducehis break-even output? Justify your view. (15 Marks)
14. Finally.What is the formula used to calculate
contribution?Contribution = selling price - variable cost
15. Finally. What is the formula used to calculate total
contribution?Total contribution = unit contribution x no. of units
sold
16. Finally. What is the formula used to calculate
profit?Profit = Total contribution fixed costs
17. Finally.What is the formula used to calculate break-even
level of output? Break-even output = Fixed costs Contribution per
unit
18. Learning ObjectivesYou should now be able to:1. Understand
what is meant by break-even.2. Calculate contribution per unit of
output and total contribution.3. Use contribution per unit to
calculate the break- even level of output.