So do you think Break even graphs are useful?

They clearly show how much output a business needs to produce / sell

If current levels ofbb output is known, you can see the margin of safety in units clearly

They take too long They are hard to get

the scale correct Once you have

made it, you can not just change the data, if for example a cost goes up

Yes No

Learning Objective 1

BREAK – EVEN ANALYSISCONTRIBUTION METHOD

MR AHERN

ESF Year 11 IGCSE

Learning Objectives

Recap and analyse the use of break even charts as a tool

Introduce Break Even contribution method

Calculate break even through contribution method

Complete break even scenario tasks by using contribution method

CALCULATING THE BREAK – EVEN POINT There are two ways to calculate the break-

even point. You have just demonstrated your competence by producing break-even chart, I’ll see how good they are over the weekend. I will want to collect your books at the end of the lesson But there is also another way…..

The contribution method

Advantages to the Contribution method

Quite simply its quicker than producing a graph

If companies sell lots of different products and have lots of different processes internally such as ford, it would take up a lot of managers time to produce a graph every time the supplier price, demand or production quantity changed.

Time is money, and manager time is not cheap, think about it, it could possibly effect the fixed cost of the product.

Making it more expensive, and in turn less competitive

Disadvantages of the contribution method

Limited data. Only displays one point, no future

inclinations. Only determines output in units needed to

break-even Doesn’t demonstrate margin of safety When altering price, or possibilities of change

in variable costs, this is demonstrated a lot less clearly.

Contribution

Essentially the difference between revenue (sales) and variable costs.

For example if a jumper sells at £45 (revenue) and it costs £12 for the material and £8 for the logos and designs the variable costs of the jumper would be £20.

The contribution per unit would be £25 £45 - £20 = £25

revenue - V.C. =contribution

Contribution Method (per unit)

This involves a two part calculation:

Revenue (selling price) per unit – variable cost per unit = contribution (towards fixed costs).

AND Fixed costs / contribution = break-even point.

Learning Objective 2

Learning Objectives

Recap and analyse the use of break even charts as a tool

Introduce Break Even contribution method

Calculate break even through contribution method

Complete break even scenario tasks by using contribution method

Example

If fixed costs = £5000, variable costs = £12 per unit, selling Price per unit =£20. Then break-even would be:

Price per unit – variable cost per unit = contribution (towards fixed costs).£20 - £12 = £8 (contribution, towards fixed costs)

Fixed costs / contribution = break-even point.£5000 / 8 = 625

625 products will need to be sold in order to break-even and cover all their costs.

Task

Dave has set up a business to print T-shirts. The fixed costs of premises and the T-shirt printers are £6000. The variable costs per T-shirt (the T-shirt, ink, wages) are £10. Each printed T-shirt sells for £25.

NOW YOU TRY!

Task Answer

Dave has set up a business to print T-shirts. The fixed costs of premises and the T-shirt printers are £6000. The variable costs per T-shirt (the T-shirt, ink, wages) are £10. Each printed T-shirt sells for £25.

Revenue per unit – Variable Cost Per Unit = Contribution

£25 - £10 = £15 (Contribution per unit)

Fixed Costs / Contribution per unit = Break-even Point.£6000 / 15 = 400

Dave must sell 400 T-shirts to brake even

Task 2

Tina starts a business making and selling shoes and has the following costs:

Fixed Costs £80,000 per yearVariable Costs £25 per pairSelling Price £75 pair

Calculate the break-even point?

Answer

Revenue – Variable Cost = Contribution £75- £25 = £50 (Contribution)

Fixed Costs / Contribution = Break-even Point.

£80,000 / £50 = 1600

Tina has to sell 1600 pairs of shoes to brake even.

Task 1Revenue Variable

CostsFixed costs Contributi

onBreak-even(Units)

Item 1 30 18 15,000

Item 2 120 65 95,700

Item 3 315 206 192,712

Item 4 22 19 22,554

Item 5 25.00 12.50 3,750

Item 6 11.50 6.12 3,228

Item 7 116.25 51.16 32,550

Learning Objectives

Recap and analyse the use of break even charts as a tool

Introduce Break Even contribution method

Calculate break even through contribution method

Complete break even scenario tasks by using contribution method for next lesson

OK You have task 2 (the scenarios)

First thing to do here is work out what is a FC what is a VC and what is R (revenue)

You can get the answers to this in your book

After doing that you should find the task relatively easy, well at least to start with

I want to see at least the first one completed today and the rest handed in next lesson

Feedback time I will give you a post-it Please stick them on the board on

your way out with any comments you have for me

You do not need to put your name on these

And if you leave it blank you can put it at the top of the board if you enjoyed the lesson, and the bottom of the board if you did not.

If you find it hard please let me know