breakeven analysis. key terms (1) before we start studying breakeven it is essential that you...

Breakeven analysis

Breakeven analysis

Key terms (1)

Before we start studying breakeven it is essential that you

understand some key terms:

Breakeven is the point at which total revenue equals total

costs. Breakeven analysis helps businesses make decisions

about prices, costs and the level of sales.

Turnover or sales revenue is the money a business receives

from selling its goods.

Total revenue = Price per product x Quantity sold

If I charged £20 for each product and sold ten then my total

revenue would be £200.

Breakeven analysis

Key terms (2)

Total costs = Fixed costs + Variable costs

Fixed costs are costs that do not change as output changes, e.g. rent.

Variable costs depend on the amount a business produces, e.g. the more milkshakes McDonald’s sells, the more ingredients it will need.

Breakeven analysis

Key terms (3)

Contribution per unit is:

Selling price per unit – Variable price per unit

Margin of safety is the point at which a firm’s actual sales are

greater than its breakeven point.

Breakeven analysis

Scenario: AP Sports (1)

Andy set up AP Sports in 2012 and his costs and revenues were as follows:

Price per unit: £10

Variable cost per unit: £5

Fixed costs: £10

We can lay this out in a table format to help us understand the theory.

Breakeven analysis

Scenario: AP Sports (2)

Number sold Fixed costs

(£)

Variable

costs (£)

Total costs

(£)

Total

revenue (£)

0 10 0 10 0

1 10 5 15 10

2 10 10 20 20

3 10 15 25 30

4 10 20 30 40

5 10 25 35 50

Breakeven analysis

Scenario: AP Sports (3)

• The fixed costs remain constant at £10.

• Total costs are when fixed costs are added to variable costs.

• The breakeven point is at two units, as the total revenue

equals total costs.

Breakeven analysis

The formula method

A much quicker way to calculate the breakeven is:

Total fixed costs ÷ Contribution per unit

Breakeven analysis

Why is breakeven useful?

• It helps assess the impact of price changes.

• It helps assess changes in costs.

• It is a useful planning tool.

• It is an essential part of any business plan.

Breakeven analysis

Problems with breakeven

Breakeven is only a forecast. It can change if:

•the price of raw materials changes

•the number of competitors changes

•the current market is volatile and breakeven becomes less predictable

Breakeven analysis

Student task (1)

Fixed costs: £2,000 per month

Variable cost per unit: £50

Price per unit: £100

Breakeven analysis

Student task (2)

Based on the information on the last slide:

1. Draw a table for the monthly data (going up in units of 10) and try

and identify the breakeven figure.

2. Calculate the breakeven using the formula method.

3. Draw a breakeven diagram on graph paper, labelling it as follows:

total revenue, total costs, fixed costs, breakeven point