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Break even and forecasting profits. Break even formula and how to use break even analysis as part of your pricing strategies
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Break Even Analysis and Forecasting ProfitsA flipped lesson by Mr. Meyerfor Business Studies 3 students
Sales Forecasting
• Use of a cost volume graph.
• Shows relationship between Total Revenue and Total Costs
on a graph.
• Profit can be shown graphically.
• Total Costs = Fixed costs and Total Variable costs.
• Fixed costs are costs that do not vary regardless of how
many units are sold.
• Variable costs are costs per unit sold * number of units
sold.
Break Even Analysis
• Determines the level of sales needed to cover all costs
(fixed costs and variable costs).
• Sales above the break even point means a profit.
• Sales below the break even point means a loss
Break Even Formula
• Break Even (quantity)
• = Total fixed costs
• Sales Price – Variable costs per
unit
Break Even Example on Page 416Fixed costs = $600000
Sale price of tennis racquet = $200
Variable cost of each tennis racquet = $80
BE= Total fixed costs
Sales Price – Variable costs per unit
• BE = 600000
(200-80)
= 600000
120
Break Even = 5000 units
What does it mean for ‘Better Racquets’?
• 5000 racquets need to be sold in one year to break even
• That means under 100 racquets need to be sold every
week to break even.
• If the business sells less than 100 racquets then ‘Better
racquets has made a loss.
• If the business sells more than 100 racquets then ‘Better
racquets has made a profit.
A graphical exampleBy using a cost volume graph it illustrates when a profit or loss is expected.
Use the graph on Page 416 of your text.
Break Even Graph Dissected
Fixed Costs Variable Costs
Total Costs
Total costs = Fixed costs + variable costsThe Total Costs curve begins at 0 sales and Fixed costs.
Break Even AnalysisA worked example
• Using figure 12.17 from page 416 in your text.
• Sales Price = $1000
• Variable cost per unit = $800
• Fixed costs = $30000
Break Even AnalysisA worked example
• Using figure 12.17 from page 416 in your text.
• Sales Price = $1000
• Variable cost per unit = $800
• Fixed costs = $30000
BE= Total fixed costs
Sales Price – Variable costs per unit
• BE = 30000
(1000-800)
= 30000
200
Break Even = 150 units
Units Fixed Costs Variable costs Total costs Revenue Profit
0 30000 0 30000 0 -30000
25 30000 20000 50000 25000 -25000
50 30000 40000 70000 50000 -20000
75 30000 60000 90000 75000 -15000
100 30000 80000 110000 100000 -10000
125 30000 100000 130000 125000 -5000
150 30000 120000 150000 150000 0
175 30000 140000 170000 175000 5000
200 30000 160000 190000 200000 10000
225 30000 180000 210000 225000 15000
The Excel Spread Sheet Table
0 25 50 75 100 125 150 175 2000
25
50
75
100
125
150
175
200
225
250
Fixed CostsTotal costsRevenue
Sales
Tota
l cost
s ($
,000)
Break Even Point at 150 units
Fixed costs start at 0 sales
Loss making area
Profit making area
Check your understanding
Page 423
Revision Questions 1,2,3 & 5
Break even exercise on page 423 , Question 7
