Upload
marsha-black
View
212
Download
0
Embed Size (px)
Citation preview
Break Even AnalysisBreak Even Analysis
Learning ObjectivesLearning Objectives
In today’s lesson you will earn about:In today’s lesson you will earn about:Re-cap of cost curvesRe-cap of cost curvesWhat is meant by revenue and how to What is meant by revenue and how to
calculate itcalculate itWhat a revenue curve looks like and how What a revenue curve looks like and how
to draw it to draw it Construction of a break even chartConstruction of a break even chart
CostsCosts
Costs
output
Fixed costs
Total costs
Variable costs
Total revenueTotal revenue
The value of the goods or services a The value of the goods or services a business sellsbusiness sells
Total Revenue = Price (of product) x Total Revenue = Price (of product) x quantity (sold)quantity (sold)
Example - if our previous example sells Example - if our previous example sells 10 of its product at £4 its revenue from this 10 of its product at £4 its revenue from this sale is;sale is;
Total revenue = 10x £4 = £40Total revenue = 10x £4 = £40
Total revenue and output (Firm X)Total revenue and output (Firm X)
Output (iPads)Output (iPads) Total Revenue(£)Total Revenue(£)
00 00
1010 4040
1515 6060
2020 8080
2525
3030
ExerciseExercise
In our previous example lets assume that the In our previous example lets assume that the firm we were looking at sells it’s product at £4firm we were looking at sells it’s product at £4
We’ll assume it sells all its output up to 30 unitsWe’ll assume it sells all its output up to 30 units Ie when it produces 10 units it sells all 10 at £4 Ie when it produces 10 units it sells all 10 at £4
so its revenue is £40so its revenue is £40 Now draw a new table showing costs, output Now draw a new table showing costs, output
and revenueand revenue Plot the firm’s revenue curve on a new graphPlot the firm’s revenue curve on a new graph
Revenue CurveRevenue CurveCosts/price
output
Total revenue
Break Even ChartBreak Even Chart
Now plot all the firms cost curves and Now plot all the firms cost curves and revenue curve on one big graphrevenue curve on one big graph
Use on side of A4 to do thisUse on side of A4 to do thisUse different colours for your lines if Use different colours for your lines if
possiblepossibleYou should have something that looks like You should have something that looks like
this: this:
Break Even ChartBreak Even Chart
Costs/prices
output
Fixed costs
Total costs
Total revenue
Break even output
Break even point
Profit( margin of safety)
loss
Explanation of Break Even Explanation of Break Even ChartChart
Shows the profit or loss made by the firm at Shows the profit or loss made by the firm at each level of productioneach level of production
The amount of profit is shown as the distance The amount of profit is shown as the distance between the total revenue and total cost curvesbetween the total revenue and total cost curves
Where total revenue = total cost is the break Where total revenue = total cost is the break even point I.e. neither profit or loss is madeeven point I.e. neither profit or loss is made
Above the break even point profit is madeAbove the break even point profit is made Below the break even point losses are madeBelow the break even point losses are made
Exercise Exercise
Caroline’s café 2 case studyCaroline’s café 2 case studyTasks 1,2,3,4Tasks 1,2,3,4
Decision making with break Decision making with break even even
Shows the effects of changes in costsShows the effects of changes in costsShows the effect of changes in Shows the effect of changes in
price/revenue price/revenue
limitationslimitations
Assumes all of the product is soldAssumes all of the product is soldUnexpected changes in costs can render Unexpected changes in costs can render
the chart obsolete the chart obsolete
Break Even FormulaBreak Even Formula
Break even = Break even = Fixed CostsFixed Costs
selling price – variable cost/unitselling price – variable cost/unit
ProfitProfit
Profit=Total revenue-total costsProfit=Total revenue-total costsEconomists see profit as the reward to Economists see profit as the reward to
entrepreneurs for risk taken in organising entrepreneurs for risk taken in organising the factors of productionthe factors of production
Land-rent, labour-wages, capital-interest, Land-rent, labour-wages, capital-interest, enterprise-profit enterprise-profit
Exercise Exercise
Page 360 It Makes You Think Questions Page 360 It Makes You Think Questions a, b,c,d,ea, b,c,d,e
Page 365 Heinemann textbook integrated Page 365 Heinemann textbook integrated activity Questions 1- 4activity Questions 1- 4
Question 1Question 1
Fixed CostsFixed Costs Van MOTVan MOT Javeds Salary Javeds Salary New photocopierNew photocopier Andrea’s salaryAndrea’s salary Fax machineFax machine Drivers salaryDrivers salary HeatingHeating LightingLighting New office carpetNew office carpet Tea bagsTea bags
Variable CostsVariable Costs PetrolPetrol Blank paperBlank paper Electricity for the pressElectricity for the press Ken’s wagesKen’s wages Telephone billTelephone bill Printing inkPrinting ink Distribution wagesDistribution wages StationaryStationary
Question 2Question 2
Break even = fixed costs/selling price - Break even = fixed costs/selling price - variable cost/unit variable cost/unit
Break even = 100/1.50-1.20 = 333.3 Break even = 100/1.50-1.20 = 333.3 i.e. 333.3 posters to break eveni.e. 333.3 posters to break evenBen has accepted the order for 500 Ben has accepted the order for 500
posters because he knows he will make a posters because he knows he will make a profit on every poster after 334 have been profit on every poster after 334 have been produced produced
Question 3Question 3
Break even = fixed costs/selling price - Break even = fixed costs/selling price - variable cost/unit variable cost/unit
New break even = 130/1.50-1.20 = 433.3New break even = 130/1.50-1.20 = 433.3Yes Ben should still accept the order of Yes Ben should still accept the order of
500 posters as he will make a profit on 500 posters as he will make a profit on every poster after 434 have been every poster after 434 have been produced produced
Question 4 Question 4
Break even = fixed costs/selling price - Break even = fixed costs/selling price - variable cost/unit variable cost/unit
(a) BE = 100/1.40-1.20 = 500 posters(a) BE = 100/1.40-1.20 = 500 posters (b) BE = 100/1.30-1.20 = 1000 posters(b) BE = 100/1.30-1.20 = 1000 posters
Ben should suggest selling price of £1.40 Ben should suggest selling price of £1.40 in order to make a profit ( at £1.30 he will in order to make a profit ( at £1.30 he will only break even) only break even)