Review Break Even Charts

1
Aims For Today

• Review Break Even Charts
• Practice Reading information from Beak Even
  Charts

2
Recap

• TC what 2 things added together?
• TR what multiplied by what?
• Variable costs vary in proportion to?
• A business will make a profit when what exceeds
  what?

3
Recap

• At Break Even what equals what?
• Break even output can be calculated using using
  the formula?

4
Reading information
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Labelling Break Even Charts
Costs / revenues s
Output
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Activity

• Produce a table which calculates Total Costs and
  Total Revenue.
• Price 10 VC 4 FC 12,000
• Max Output 5000 units
• Plot a graph labelling TC , TR

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The Results
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Work out

• Mark on the graph and state the level of profit
  if the company produces 4,000 units per week
• What is the margin of safety at 4,000 units per
  week?
• Calculate the Total VC at Break Even

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Implications of Break Even

• Is it good or bad if a company is breaking
  even..?
• If a company is not breaking even, what
• are its options..?
• IT ALL DEPENDS ON CONTEXT!!!

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Limitations of Break Even

• Assumes all output is sold Sales may not equal
  output
• Assumes output is sold at one price
• Assumes VC are constant per unit
• Only as accurate as the underlying data

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Contribution

• Contribution per unit
• Price Variable Costs per unit
• Total Contribution
• Contribution per unit x quantity sold

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Contribution

• Is used to pay a companys fixed overheads.
• Once overheads have been paid for, contributions
  will create profit!
• Demo

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Simple contribution

• A Twix costs 30p from a wholesaler
• A shop sells it for 40p
• Each time the shop generates a 10p contribution.
• The 10p is not profit, as no account has been
  taken of the shops overheads..
• When they have been covered, the contribution
  goes towards increasing profit!

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Break Even

• Fixed Costs Break Even
• Contribution per unit
• (How many unit contributions are need to cover
  Fixed costs)

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Pencil Case Question..

• Selling price 1
• Variable costs 25p plastic
• 10p zip
• 25p labour
• Total VC 60p
• Fixed Cost 1,200
• How many must I sell to break even?

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What break even quantity?

• Rise in price to 1.20. FC stay at 1,200.
• Rise in labour costs to 35p. Selling price at 1.
  FC stay at 1,200?

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What break even quantity?

• Fall in FC to 800 everything else stays the
  same. What is the new break even?
• Fall in price to 80p. FC staying at 1,200?

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How much profit?

• You sell 3,000 units (at 1 each), and
  contribution is 40p, and fixed costs are 800.
• What are your profits?

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How much profit?

• A firm with variable costs of 40p per unit has
  sales of 6,000 units at 2 each.
• The fixed costs are 4,000.
• What is the contribution per unit?
• What is the break even quantity?
• What is the firms profit?

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Is it worth it?

• Before A product sold for 2 has variable costs
  of 80p per unit. Demand is 50,000 units and fixed
  costs are 15,000
• After The firm cuts price by 20p, causing sales
  to rise to 56,000 units.
• Profit before?
• Profit after?
• Was it worth it if the company wants to boost
  profits?

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Contribution is used for..

• Special order decisions how much could an order
  contribute to potential profit?
• Decisions on whether to discontinue a product
• Whether to contract out to reduce costs and
  increase contributions

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Other factors to consider

• Business objectives increase market share or
  survival?
• Capacity is it possible to increase production?
• Reputation will the deal affect current
  customers?
• Cashflow how reliable is the new customer in
  paying/

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Homework

• Copy notes on P118 Benefits and drawbacks of
  Contributions.
• For next lesson - Monday

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Homework

• P113 B2 Case Study YOU NEED GRAPH PAPER!!
• For next lesson (Tuesday)
• (This will help you to) REVISE FOR ASSESSMENT!!!