pricing lap 4 explain break-even point. calculate break-even point for a business operation....
TRANSCRIPT
Pricing LAP 4
Explain break-even point.
Calculate break-even point for a business operation.
(Calculating Break-Even)
Explain break-even point.
Childhood lemonade stand
• Who provided your materials?
• How much did you charge?• Did you break even?
Breaking even = important for businesses
Must be able to cover costs
And hopefully—make a profit!
Lemonade 50¢
Lemons
IceSugar
Cups
Stirrers
Water
Art club bake sale
• $.75 per dessert item
• $12 in costs
• The club breaks even after selling 16 items.
• No loss, no gain
Break-even point = when the club makes enough money to cover costs and begins to make a profit
• Will earn profit as costs stay the same
Breaking Even
Businesses reach break-even point when total sales income at a given selling price equals total costs.
Must calculate total costs and estimate sales revenues to project break-even point
Predictable business costs that don't change when sales go up or down such as:
C o s t s
• Taxes
• Rent or mortgage payments• Equipment payments
or leases
• Wages and salaries
• Depreciation of physical assets
• Fees and licenses
• Interest on loans
• Insurance
Costs that change along with changes in sales volume
If sales go up, these costs increase.
If sales go down, these costs decrease.
• Shipping• Supplies• Cost of goods• Promotional costs
• Sales tax• Raw materials• Business travel• Sales commissions
C o s t s
Components of Break-Even
Vary to some extent in response to sales
Should be assigned as either fixed or variable for the purpose of calculating break-even
C o s t s
Semivariable costs
Components of Break-Even
Most businesses receive the bulk of their income
from sales revenues.
Two ways that sales revenues increase:• As the number of
units sold increases
• As the selling price per unit increases
Sales revenues
A business does not make a profit until it has passed the break-even point.
This occurs when total sales revenues are greater than total costs.
A business loses money if it does not reach its break-even point and sales revenues are less than total costs.
Profit and Loss
To determine when the business will begin making a profit
To help set prices
To determine whether to relocate the business
To determine capital needs
To determine what incentives to offer
Calculate break-even point for a business operation.
• BP—break-even point
• FC—total fixed costs
• VCM—variable-cost margin
• Formula—BP = FC ÷ VCM
• Break-even equals total fixed costs divided by the variable-cost margin.
• BP—break-even point
• FC—total fixed costs
• VCM—variable-cost margin
• Formula—BP = FC ÷ VCM
• Break-even equals total fixed costs divided by the variable-cost margin.
The amount that each sale contributes to fixed costs
Also called the fixed-cost contribution
Calculated by subtracting variable costs per unit from the selling price per unit
The amount that each sale contributes to fixed costs
Also called the fixed-cost contribution
Calculated by subtracting variable costs per unit from the selling price per unit
Step 1—Identify costs and revenues.
Step 2—Classify costs as fixed or variable.
Step 3—Total the costs in each classification.
Step 4—Calculate the variable cost per unit.
Step 5—Subtract the variable cost per unit from the sellingprice per unit to obtain the variable-cost margin.
Step 6—Divide the total fixed costs by the variable-cost margin to determine break-even.
Using break-even to determine sales commissions
Darius' company
• Deciding between 5% and 7%
• No written agreements
• Is it ethical to change the rate?
Acknowledgments
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