break-even analysis pres

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17 April 2012 easilyinteractive.com 2006-10 1

Break-even analysis

Introduction

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Morris.

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Break-even analysis

Break-even: The level of output atwhich the total costs of making theitems equals the total revenue received

from selling themMargin of safety: The difference

between the current level of output and

the break-even level of output

*

Margin of Safety = Current Output Breakeven Output


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Break-even

1. The graphical

method

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Morris.

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Tutor2u Break-even simulator

Use Tutor2us excellent Break-even Simulator on an

interactive whiteboard to demonstrate the relationshipsbetween the various variables.
http://www.tutor2u.net/assets/simulations/breakeven_simulator_1.swfhttp://www.tutor2u.net/assets/simulations/breakeven_simulator_1.swf


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Costs and revenuetask

Bobby Stokes makes Glory Materials cost 2 and overheads are 1 million per month

His factory has a capacity of 200,000 Glories

Bobby sells Glory to wholesalers for 10

Construct a data table of his costs and revenue (FC,VC, TC, TR) for ranges of output from 0 to 200,000units use increments of 20,000 units

From the data table, sketch a graph with the y-axis scale ranging from 0 to 2,000,000

Identify the break-even point

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Costs and revenuequick questions

Looking at your graph, how many Gloriesmust Bobby produce if he is to break-even?

Define break-even in a single sentence

Reading from your graph, estimate theamount of profit/loss Bobby will make if hemakes and sells:

60,000 Glories

160,000 Glories

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Break-even Simulator (Tutor2u)task

Use the simulator to find the total contribution andnet profit when: Selling price = 50

Variable cost per unit = 26

Fixed costs = 350,000

(Expected output = 15,000 units)

By how much should selling price change if the firmwishes to aim for a net profit of 40,000? What is the margin of safety at that output? What does this

mean?

Management is reluctant to raise price. Why do you think this might be?

How else could they try to achieve this target profit?

*
http://www.tutor2u.net/assets/simulations/breakeven_simulator_1.swfhttp://www.tutor2u.net/assets/simulations/breakeven_simulator_1.swf


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Break-even analysis

2. Calculation

method

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Morris.

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Calculating break-even

Contribution:Defined as thecontribution that selling a single unitmakes towards fixed costs and profit

Contribution = Price per unit Variable Cost per unit

Break-even point =

*

Fixed costs

contribution



Calculating break-evenExample

You manufacture CDs. You sell them toretailers for 8. The variable cost perCD is 1 and fixed costs are 70,000

What is the break-even output?

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Calculating break-evenExample

A fast-food restaurant sells meals for 6 each The variable costs of preparing and serving

each meal are 2

The monthly fixed costs of the restaurant

amount to 3,600

How many meals must be sold each month tobreak even?

If the restaurant sold 1,500 meals in April,what were the margin of safety and profit inthat month?

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Break-even analysis

Katies Cards

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otobyelle_

rigby.

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sion

n



Breakeven analysisKaties Cards question

Katie makes greetings cards. She hasestimated that her fixed costs for the first sixmonths of operation would be 3,000. Thevariable cost per card is estimated at 60p,

and Katie set a selling price to retailers of1.80 per card

Showing your working, calculate Katiesbreak-even output for her first six months in

operation If she sells 3,000 cards, how much profit will

she make?

*

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elle_

rigby.

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Break-even analysis

MugUp task

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Break-even analysisTask MugUp Ltd MugUp Ltd has sufficient capacity to produce 120,000 drinking

mugs per year The variable cost of producing each mug is 20p and fixed costs

total 20,000 per year

The mugs are sold to wholesalers for 60p each

a. Calculate:1. contribution per mug2. break-even output3. the margin of safety if current output is 90,000 mugs4. profits at full capacity

b. Assuming that unit variable costs, fixed costs and capacity

remain unchanged, calculate the price that MugUp would haveto charge wholesalers to obtain the target profit of 40,000 peryear at full capacity output

*

Alternative method
http://mugup%20ltd%20qns.pdf/


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Break-even analysis

Uses and limitations

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Break-even analysisuses and limitations

Break-even analysis only really works for abusiness with one product

Involves so much simplification as to beworthless

e.g. generalising costs into fixed and variable In reality (but not in exams!) the language of

break-even is more important than themathematics

Break-even point Contribution

Margin of safety

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Cashflow forecasting
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