Understanding Company Finances

DefinitionsBreak Even Point• The sales volume (express as units sold) at which the company breaks even.

Profits are $0 at the break even point. The break even point is calculated by the following formula: Break Even Point = Fixed Costs / (selling price-variable costs).

Break Even Analysis• A calculation of the sales volume (in units) required to just cover costs. A lower

sales volume would be unprofitable and a higher volume would be profitable. Break-even analysis focuses on the relationship between fixed cost, variable cost (or cost per unit), and selling price (or selling price per unit).

Fixed Costs• Cost that do not change when production or sales levels do change, such as rent,

property tax, insurance, or interest expense. The fixed costs are summarized for a specific time period (generally one month).

Definitions Cont’dVariable Cost (Per Unit Cost)• Variable costs are costs directly related to production units. Typical variable costs

include direct labor and direct materials. The variable cost times the number of units sold will equal the Total Variable Cost. Total Variable costs plus Fixed costs make up the total cost of production.

Selling Price (per unit price) • The price that a unit is sold for. Sales Tax is not included the selling price and sales

taxes paid is not included as a cost. The Selling Price times the number of units sold equals the Total Sales.

RevenueAll moneys collected.

ExpensesCosts of doing business

T-shirts R Us

• Assume that you have a small business, which sells t-shirts. You sell each t-shirt for $20. You had 300 t-shirts made and spent a total of $3000. How many t-shirts do you have to see to break even?

• 3000/20 = 150 shirts to break even.

• Your Turn- Pg. 232, #1-4

P232 #1

• If the items cost $5 ea. and the company needed $1000, they would have to sell 1000/5, or 200 units, to reach break even point.

P232 #2

• 100• 500• 2000• 600

P232 #3

• If there were 200 items and the company needed $5000, each unit would have to sell for $5000/200, or $25.

P232 #4

• As the selling price drops, the number of units sold increases. This situation happens because demand for a product increases when the price is lower.

• Assume that you sell baseball hats. You spent a total of $1500 to have the hats made. You need to sell 100 hats at $15 each to break even. How much profit would you make if you sold 100 hats for $20?

Baseball Hat Company

• Spent:$1500• Break Even = $100 x

$15• What if you sell them at

$20.00???

Revenue = 2000-Cost = 1500Profit $500

You made $500.00 Profit

Suzie has a bakery at the mall and she specializes inselling cookies. She sells each cookie for $0.50. Herfixed costs are as follows:

Rent for her store is $300 Baking supplies (pans, etc.) $50 It costs her $0.20 to make one cookie. How many cookies does she need to sell to breakeven?

Costs:Rent + Supplies = $350.00

Cost of cookie: $0.20 each.

350/.2 = 1750

She would need to bake 1850 cookies.

Randy’s Lids• Randy sells baseball hats at his friend’s store. His friend

charges him $50 per month to sell his hats in his store. Randy also pays $35 per month for the rental of an embroidery machine to embroider the hats.

• The materials to make the hat are as follows: $1.00 for the thread, $2.00 for the hat, and $0.25 for the packaging for the hat. Also, Randy recently started advertising in the local newspaper for his hats, which costs $100 per month.

• All this being said, Randy charges $25 for his hats. • A) What are Randy’s fixed monthly expenses? • B) What are Randy’s variable costs per unit? C) Figure out

Randy’s BEP. • Use Chapter 8 & 10 to help find your answers.

Sarah’s Smoothies• Sarah sells smoothies for $3 each at the Sunday Market. • In order to make one smoothie she needs the following

supplies: a. Yogurt $0.35 b. Banana $0.15 c. Orange Juice $0.25 d. Strawberries $0.25 Her other costs are $50 for the blender and $35 for the monthly table rental.

• A) What are Sarah’s variable costs? • B) What are Sarah’s Fixed costs? • C) What is Sarah’s selling price? • D) Figure out how many smoothies Sarah needs to sell to

break even using the correct BEP equation. •

Use Chapter 8 & 10 to help find your answers.