Break even charts

Specification detail

• How to draw and interpret break-even charts

13/01/12 Break-even

• All students will be able to calculate total costs and revenues

• Most students will be able to calculate the break-even formula

• Some students will be able to draw the break-even chart

Break-even

• Break-even is whenTotal costs = Revenues

Where neither a profit nor a loss is made.

Total costs = fixed + variable costs

Fixed & Variable Costs

A business’s Fixed Costs are £5,000,

its Variable Costs are (per unit):

Labour £2.00Raw Materials £3.00

Total Costs to make 1,000 products are:

1,000 x £5.00 + £5,000 = £10,000

Revenue

• Revenue is income from selling products.Selling price of 1 unit x number of units sold

• What is the revenue from the following sales?• 50 t-shirts are sold at a price of £10 each• 30 sponge cakes at £1 each• 5 pairs of shoes at £20 each

Before we start …

As always with any kind of model we need to make some assumptions. These are:

• Fixed costs don’t change

• Selling price stays the same

• Variable costs vary in direct proportion to output

• Every unit of output is sold

Calculating Breakeven

TWO main ways we can calculate breakeven output:• We can use a formula• We can use a graph

Formula is:

Break-even point = Fixed costs (selling price per unit – variable cost per unit)

Break-even formula

A business has:• fixed costs of £500 per week • variable costs of £15 per product

sold• selling price is £25

Break-even point (BEP):500 25-15

BEP: 50010

BEP: 50 units

So, the business must sell 50 units before it breaks even

Features of a Break Even GraphCosts/Revenue

Jackets

500

1000

1500

2000

2500

3000

025 50 75 100 125 150

Break- even

Revenue is the same as Sales

Total Costs

Fixed Costs

75 Jackets

LOSS

PROFIT

Variable Costs

Break-even point graph

• Complete Louisa’s designs break-even worksheet

Why use breakeven analysis?

• Predicting future profit levels

• Calculating how long it will take to make a profit

• A quick estimate

• Calculating the output required to meet a profit target

Limitations of Break-even Charts

• Do not take into account possible changes in costs over time period

• Do not allow for changes in selling price

• Analysis only as good as quality of information

• Do not allow for changes in market conditions in time period – e.g. entry of new competitor