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