Break even

• Break even

  This occurs when Total Revenue = Total Costs. Profit/ loss = 0. Break even point (no of units) = Fixed Costs / (Price – Variable Costs)
• Variable costs Change directly with the number of products made. e.g. stock, wages
• Fixed costs Do not change at any level of output e.g. rent, salaries
• Total Costs The sum of all costs at a any level of output. TC = Fixed costs + variable costs
• Total Revenue Money earned by a business by selling products. It increase directly with the number of products sold. Total Revenue = Price X Output
• Profit Money left after all costs have been repaid. Profit = Total Revenue – Total Costs
• Margin of Safety The amount of output between the actual level of output where profit is being made and the break even level of output. Margin of Safety = Actual Output – Break even point output
• Contribution Price per item – Variable cost per item. Price – variable cost
• Total Contribution (Price – Variable Cost) x Quantity sold (P-VC)Q
• Why Use Break Even Analysis

  • To set a target & understand risk

  . • To understand how different Fixed or Variable costs or higher or lower prices would effect the break even point (What if analysis).

  • To calculate their margin of safety – so a business understands how safe they are from making a loss

  • To use in a business plan to obtain a bank loan. BUT, remember, it does not consider the impact of external factors, assumes that all output is sold and most businesses sell more than one product.
• Break Even Analysis Advantages & Disadvantages

  ADVANTAGES • Business knows how many it must sell to cover its costs

  • Business can set targets

  • Helps identify fixed and variable costs

  • Can help identify if costs are too high and work on how to lower them • Can set staff/management targets
• Break Even Analysis Advantages & Disadvantages

  DISADVANTAGES•

  • Doesn’t take into account variations in costs or selling prices •

  • Doesn’t factor in businesses usually have a range of selling prices for different services• • Forecasts may not be achieved•

  • Targets set may be too high. •

  • Doesn’t offer a time scale to achieve break even point • E
• Break even


  Occurs when Total Revenue = Total Costs. Profit/ loss = 0.
• Break even point (no of units)


  Fixed Costs / (Price – Variable Costs)
• Variable costs


  Change directly with the number of products made. e.g. stock, wages.
• Fixed costs


  Do not change at any level of output e.g. rent, salaries.
• Total Costs


  The sum of all costs at a any level of output. TC = Fixed costs + variable costs
• Total Revenue


  Money earned by a business by selling products. It increase directly with the number of products sold.
• Total Revenue


  Price X Output
• Profit


  Money left after all costs have been repaid. Profit = Total Revenue – Total Costs.
• Margin of Safety


  The amount of output between the actual level of output where profit is being made and the break even level of output.
• Margin of Safety


  Actual Output – Break even point output
• Contribution


  Price per item – Variable cost per item.
• Costs


  Money spent by firms making their products
• Types of costs


  • Fixed costs
  • Variable costs
• Fixed costs


  • Remain the same no matter how much is produced
• Variable costs


  • Change depending on output
• Different types of costs

  • Fixed costs
  • Variable costs
  • Semi-variable costs
• Fixed costs


  • Do not vary with output, for example rent, salaries
• Variable costs


  • Vary with the level of output, for example raw materials
• Semi-variable costs


  • Part of the cost stays the same and part varies in relation to the degree of business activity, for example a worker may be paid a fixed rate of pay but earn additional payments for working overtime
• Total costs


  Total fixed costs + total variable costs
• Breakeven


  The point at which the sales are exactly the same as the costs
• Total costs


  1. Total fixed costs

  2. Total variable costs
• Sales revenue


  1. Selling price

  2. Number of units sold
• Profit


  1. Sales revenue

  2. Total costs
• Break Even Point


  The point where the business is not making a profit or a loss, where total revenue equals total costs
• Break Even Formula


  Fixed costs / (Contribution per unit)
• Contribution per unit


  Selling price - Variable cost per unit
• Total Contribution


  1. Sales Revenue

  2. Total variable costs