1

How much is it?

Pricing you good or services so that you make a profit – one that will keep

you in the lifestyle you wish to become accustom to!

2

Setting prices

We need to set a price that customers will be willing to pay and it must cover all our costs but it must also make a profit.

After all, people go into business to make a profit.

3

Pricing

It is one of the more tricky areas of business.

Prices can be determined by what your competitors charge, the government, your costs.

4

Break Even Analysis

Prices can be calculated using costs that the business pays. Cost is different to what we pay for stock or

materials because it’s the unit cost not the total cost we use.

The business buys 500 yo-yos which total $1250.

But sells only one! Which means they have only incurred $2.50 cost of goods sold because the rest of the yo-yos still belong to the business.

5

Fixed and Variable Costs

Costs are divided into: Variable Fixedfor the purpose of Break Even Analysis

6

Variable costs - examples

Materials used to make the goods: Wood made into a wooden toy. Freight to get the toys to the shops. Chemicals to make toothpaste.

or used to perform the service: Fuel for the mower in a lawn mowing business.

7

What are we selling?

We are selling toothpaste for chickens. It cost $50.00 to make

per tube.

This is expensive but

good.

8

Work out Total Variable cost

Variable costs are those which vary directly with the amount of goods or services sold.

If we sell

10 tubes 20 30 40 50 60 73

We use up $50.00 worth of chemicals to make each tube.

50.00 50.00 50.00 50.00 50.00 50.00 50.00

Total Variable Cost

500.00 1000.00 1500.00 2000.00 2500.00 3000.00

3650.00

9

Go to Break Even Exercises – Variable Costs

10

Graphing Variable Costs

If we take the information from the table, we can create a graph…

…where the line increases with every sale.

11

Variable Cost Graph

0

1000

2000

3000

4000

5000

6000

0 10 20 30 40 50 60 73 80 90 100

Variable

12

So?

The graph shows that every time we sell a tube of toothpaste, variable cost rise.

If we sell no toothpaste, we incur no variable cost.

If we sell 50 tubes of toothpaste, variable cost is $2500.00 (or 50 tubes by $50.00 each).

13

The other Costs

If it is a cost which is not used up with each sale, then it is NOT a variable cost.

But what is it?

14

Work out Total Fixed Costs

Fixed costs are those payments which have to be paid regardless of the number of sales you make.

Wages $2000.00Rent $1000.00Lease payments $500.00Telephone $150.00Total $3650.00

15

Fixed Costs

Sales

10 20 30 40 50 60 72.70

Fixed cost per unit

3650.00 3650.00 3650.00 3650.00 3650.00 3650.00 3650.00

Total 3650.00 3650.00 3650.00 3650.00 3650.00 3650.00 3650.00

16

Go to Break Even ExercisesFixed Costs

17

Graphing Fixed Costs

Again when we put the information from the Fixed Cost table into a graph…

18

Fixed Cost Graph

0

500

1000

1500

2000

2500

3000

3500

4000

0 10 20 30 40 50 60 73 80 90 100

Fixed

19

And?

This time we get a straight line because Fixed costs don’t vary with the number of sales.

If we make one sale, Fixed Costs are $3650 and if we make 100 it is still $3650

20

Total Costs

If we graph Fixed Costs and Variable Costs, we get Total Costs per unit…

21

Total Cost Graph

0100020003000400050006000700080009000

10000

0 10 20 30 40 50 60 73 80 90 100 110

Fixed

Variable

What’s the green line?

Total costs

22

Recap - Do we know the difference between Variable and Fixed?

Flour = 50¢ per pizzaMeat = 60¢ per pizza Cheese = 90¢ per pizzaPetrol = $2.00 per pizza Rent $600Wages $400

Variable Cost 50¢ + 60¢ + 90¢ + $2 = $4Fixed Cost $400 + $600 = $1000

23

What did you notice?

Variable costs are usually smaller than Fixed.

Variable costs are usually ‘per’ something. Fixed costs are larger than Variable. Fixed costs are total amounts.

24

Break Even Point

This is the point at which revenue (income) equals expenses (costs).

That is, there is no profit or loss made.

If the selling price of our items is $100.00, then…

25

Calculating Break Even Point

Total Fixed costs

Selling price - Variable Costs per unit

3650.00 = 73 units

100.00 - 50.00

26

This means…

When the business sells 73 units of toothpaste there will be no profit or loss.

If the business sells less that 73 units, there will be a loss which is recorded in brackets.

If the business sells more than 73 units, it will make a profit. The more it sells, the more profit.

27

How it works: Sales less Total costs = Profit or loss

Sales 10 X

100.00 = $1000.00

20 X

100.00 = $2000.00

30 X

100.00 = $3000.00

40 X 100.00 = $4000.00

50 X 100.00 = $5000.00

60 X 100.00 = $6000.00

73 X 100.00 = $7300.00

Fixed costs

3650.00 3650.00 3650.00 3650.00 3650.00 3650.00 3650.00

Variable

$50.00 per unit

500.00 1000.00 1500.00 2000.00 2500.00 3000.00 3650.00

Total costs

Profit/ Loss

4150.00

(3150.00)

4450.00

(2450.00)

5150.00

(2150.00)

5650.00

(1650.00)

6150.00

(1150.00)

6650.00

(650.00)

7300.00

0

28

Go to Break Even Exercises Break Even

29

If we put all the graphs together

We can see where the Break Even Point is…

30

At 72.70 units

0

2000

4000

6000

8000

10000

12000

0 10 20 30 40 50 60 73 80 90 100

FixedVariableSales

Break Even Point

31

Break Even Point – Profit & Loss Statement

Sales Revenue 73 X $100 7300

Less Variable 73 X $50 3650

Variable Profit 3650

Less Fixed Costs

Wages 2000

Rent 1000

Lease 500

Telephone 150 3650

Net Profit 0

Revenue is earned by the business when they sell stock / goods.

Expenses are payments for things the business does not own but need to make revenue.

32

But…

We want to make a profit! We want to have money to take home! We want to buy a Porsche!!! So we use a different formulae…

33

Calculating the selling price to make a profit

Total Fixed costs + Profit

Selling price - Variable Costs

3650.00 + 2000.00 = 113 units

100.00 – 50.00

34

Result

The business has to sell more units to cover costs and make the profit.

35

Go to Break Even Exercise - Profit

36

Go to Break Even Exercise – Profit & Loss Statement