Ani spends 1000 on hiring a hall and disco She sells 200 tickets at 600 each Has she made a profit or a loss Bradley buys a second hand bike on ebay for 200 he spends 50 doing it up and then sells back on ID: 151217
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Slide1
Topic B.1 Understand the planning tools businesses use to predict when they will start to make a profit
Ani
spends £1000 on hiring a hall and disco. She sells 200 tickets at £6.00 each. Has she made a profit or a loss?
Bradley buys a second hand bike on
ebay
for £200, he spends £50 doing it up and then sells back on
ebay
for £300. Has he made a profit or a loss?
Wendy bakes 150 cupcakes using £300 worth of ingredients. She sells only 100 of them at £3.00 each. Has she made a profit or a loss?
What would have happened if Wendy sold all her stock
?Slide2
Topic B.1 Understand the planning tools businesses use to predict when they will start to make a profit
By the end of this topic you will be able to:
Define breakeven
Interpret a breakeven chart
Calculate breakeven
Analyse and explain the importance of breakeven analysis
Analyse and explain the risk of not completing a breakeven analysis
Present information on a breakeven chart
Analyse the effect of changes to breakevenSlide3
Breakeven
Breakeven is
when a business has enough revenue from sales to cover the costs of making the products
T
he point at which a business is not making a profit or a loss i.e. it is just breaking even
Therefore at this point total costs must be the same as total revenueTR > TCTR = TCTR < TC
Can you explain these emotions
?Slide4
Breakeven charts
Breakeven can be calculated by plotting the lines on a breakeven chart
This makes it easy to see where the breakeven point is i.e. where Total Costs = Total Revenue
Breakeven point is expressed as a number of units e.g. 2000 T-shirtsSlide5
Breakeven Charts – the build up
Fixed costs
stay the same and are therefore a ___________ ___________ line.
Variable costs change in relation to the number of items produced and therefore start at ____ and slope __________. Total Costs are fixed costs plus variable costs and therefore start at the point of ______ ____and then slope upwards at the same gradient as __________ _____.
£
No of items
£
No of items
£
No of itemsSlide6
Breakeven Charts – the build up
Total Revenue
increases with the amount of units sold and therefore starts at ______ and slopes ________ .
We now have to put our cost and revenue lines together to find the breakeven point. The important 2 lines being total costs (TC) and total revenue (TR).
No of items
£Slide7
Breakeven Charts – the build up
Costs and revenues
£
Units
0
FC
VC
TC
TRSlide8
Breakeven Charts
Costs and revenues
£
Units
0
FC
TC
TR
Breakeven point
Breakeven outputSlide9
Breakeven Chart
What are the fixed costs at 2000 units?
What are the variable costs at 2000 units?
What are the total costs at 1000 units?
What is the total revenue at 3000 units?
What is the breakeven level of output?Slide10
Using a breakeven chartAs well as identifying costs, revenues and break even a breakeven chart can also be used to:
Identify the margin of safety
the difference between actual output and breakeven output
Actual output – breakeven output = margin of safetySlide11
Breakeven Charts
Costs and revenues
£
Units
0
FC
TC
TR
Breakeven output
Actual output
Margin of safetySlide12
Breakeven Chart
What is the breakeven level of output?
Actual output is 3000 units. What is the margin of safety?Slide13
Using a breakeven chartAs well as identifying costs, revenues, breakeven and margin of safety a breakeven chart can also be used to:
Calculate profit at different levels of output
Calculate loss at different levels of outputSlide14
Breakeven Charts
Costs and revenues
£
Units
0
FC
TC
TR
Loss
ProfitSlide15
Breakeven Charts
£
No of items
TR
TC
Q1
TC1
TR1
TC1>TR1 = Loss
Q2
Q3
TR3
TC3
TR3 >TC3 = Profit
TC2 = TR2 = BEPSlide16
Breakeven Chart
At 1500 units will the business make a profit or a loss?
At 2500 units will the business make a profit or a loss?
If they sell 1000 units how much profit or loss is made?
If they sell 3000 units how much profit or loss is made?Slide17
Breakeven
Why might a start-up business be satisfied if it breaks even in its first year?
Statement
True or false
Explain your answer
Fixed cost is a horizontal straight lineTotal cost line starts at zero
Breakeven point is where total revenue is equal to variable costs
If TC is less than TR a business has passed breakeven point
Margin of safety is to the right of breakeven
If fixed costs go up and everything else stays the same breakeven point will riseSlide18
Calculating breakevenBreakeven can be calculated using the following formula:
In the examination the formula will be given to you.
fixed costs
selling price per unit – variable cost per unitSlide19
Calculating breakeven
A business manufactures computer desks.
Fixed costs = £10 000
Variable cost per desk = £22
Selling price = £47
How many desks do they need to sell to breakeven? fixed costs selling price per unit – variable cost per unitSlide20
Calculating breakeven
A business manufactures computer desks.
Fixed costs = £10 000
Variable cost per desk = £22
Selling price = £47
How many desks do they need to sell to breakeven?Step 1: £10 000 Step 2: £10 000 Step 3: 400 desks £47 - £22 £25 fixed costs
selling price per unit – variable cost per unitSlide21
Drawing a breakeven Chart
A business manufactures computer desks.
Fixed costs = £10 000
Variable cost per desk = £22
Selling price = £47
Draw a break even chartStep 1: Complete the table belowStep 2: plot the total cost and total revenue line on graph paperStep 3: label the breakeven point
Desks0
200400600
FC
VC
TC
TRSlide22
Question time 1 mark
A business manufactures rocking horses.
The table shows their predicted figures for the next year.
How many rocking horses do they need to sell to breakeven?
rocking horses
fixed costs selling price per unit – variable cost per unit
£
Selling price per rocking horse
100
Variable cost per rocking horse40Fixed costs
12 000Slide23
Break even
Kristen runs a small business making balloon decorations for weddings, birthday and corporate events. She sells an average of 100 displays per month at a price of £90. Each balloon display costs £20 to make. She delivers them to venues costing her £1000 per month, pays an assistant a wage of £900 per month and advertises in a local paper for £150 per month. As a sole trader Kristen does not pay herself any money but is hoping to be able to take money out of the business if it makes a profit.
Question time
What is meant by the term
‘breakeven’?
(
2 marks)
Calculate Kristen’s breakeven point.
(4 marks)Will Kristen be able to take some money out of the business? Justify your answer. (3marks)Slide24
Importance of BreakEven analysis to businesses when planning for success
Prior to trading an entrepreneur may draw a break even chart or calculate breakeven to help see if their proposal is feasible i.e. how many units will they need to sell to breakeven
This can then be compared to predicted sales estimated from market research
If predicted sales is greater than breakeven point they may then consider by how much
Help identify and track costs
Identify where costs can be reduced e.g. change suppliersCan calculate predicted profit or lossCan help make decisions about what price to charge Slide25
Risk of not completing Breakeven analysis
Will not know how many items need to be sold to breakeven
Difficult to set targets
Will not know margin of safety
Costs may be higher than revenue
May be hard to raise finance, a bank manager may want a business to prove it can reach break even pointDecisions re price may be wrong as ill informedSlide26
Variables change!
A breakeven chart shows costs and revenues but what happens if theses change?
What variables might change?
Fixed Costs
Landlord puts rent up
Bank changes interest ratesManagement want pay increaseVariable CostsRaw materials change in priceMinimum wage is increasedUtility companies change priceSelling PriceNew competition therefore forced to lower pricePositive word of mouth puts demand up
Work in pairs to explain what would happen to breakeven in each instance.Slide27
Breakeven Charts – changing variables – what would happen if fixed costs rose?
Costs and revenues
£
Units
0
FC
TC
TRSlide28
Breakeven Charts – changing variables – Rise in fixed costs
Costs and revenues
£
Units
0
FC
TC
TRSlide29
Breakeven Charts – changing variables – What would happen if variable costs fell?
Costs and revenues
£
Units
0
FC
TC
TRSlide30
Breakeven Charts – changing variables – variable costs fall
Costs and revenues
£
Units
0
FC
TC
TRSlide31
Breakeven Charts – changing variables – what would happen if there was a new competitor and price was lowered?
Costs and revenues
£
Units
0
FC
TC
TRSlide32
Breakeven Charts – changing variables – lower price
Costs and revenues
£
Units
0
FC
TC
TRSlide33
Topic B.1 Understand the planning tools businesses use to predict when they will start to make a profit
You have now completed this topic, are you able to?
Be able to define breakeven
Interpret a breakeven chart
Calculate breakeven
Analyse and explain the importance of breakeven analysisAnalyse and explain the risk of not completing a breakeven analysisPresent information on a breakeven chartAnalyse the effect of changes to breakevenTry the test yourself quiz number 3