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Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

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Page 1: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

Pricing LAP 4

Explain break-even point.

Calculate break-even point for a business operation.

(Calculating Break-Even)

Page 2: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

Explain break-even point.

Page 3: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

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

Page 4: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

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

Page 5: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-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

Page 6: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

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

Page 7: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

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

Page 8: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating 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

Page 9: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating 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

Page 10: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

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

Page 11: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

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

Page 12: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

Calculate break-even point for a business operation.

Page 13: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

• 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.

Page 14: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

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

Page 15: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

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.

Page 16: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating 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?

Page 17: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

Acknowledgments

Original Developers:

Sarah Bartlett Borich and Lelia Ventling, MarkED

Version 1.0

MarkED Resource CenterCopyright © 2007

Page 18: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

Digital-based photography sources:

Liquid Library

Various images used in this presentation are ©2004 Liquid Library. All rights reserved www.liquidlibrary.com

Microsoft Clip Gallery LiveVarious clipart used in conjunction with ©PowerPoint 2005® Clip Art, ©Microsoft®

All rights reserved One Microsoft Way, Redmond, WA , 98052-6399 USAwww.dgl.microsoft.com

Page 19: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

Copyright:

All photographic digital images on this CD are owned

by the aforementioned photographic resources or

their licensors and are protected by the United States

copyright laws, international treaty provisions, and

applicable laws. No title to or intellectual property

rights to the images on this CD are transferred to you.

These sources retain all rights and are not to be used,

digitally copied, transferred, or manipulated in any

way. To do so is a violation of federal copyright laws.

Page 20: Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)