break-even analysis pres
TRANSCRIPT
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Break-even analysis
Introduction
PhotobyA.
Morris.
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Break-even analysis
Break-even: The level of output atwhich the total costs of making theitems equals the total revenue received
from selling themMargin of safety: The difference
between the current level of output and
the break-even level of output
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Margin of Safety = Current Output Breakeven Output
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Break-even
1. The graphical
method
PhotobyA.
Morris.
Usedwithpermission
Tutor2u Break-even simulator
Use Tutor2us excellent Break-even Simulator on an
interactive whiteboard to demonstrate the relationshipsbetween the various variables.
http://www.tutor2u.net/assets/simulations/breakeven_simulator_1.swfhttp://www.tutor2u.net/assets/simulations/breakeven_simulator_1.swf -
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Costs and revenuetask
Bobby Stokes makes Glory Materials cost 2 and overheads are 1 million per month
His factory has a capacity of 200,000 Glories
Bobby sells Glory to wholesalers for 10
Construct a data table of his costs and revenue (FC,VC, TC, TR) for ranges of output from 0 to 200,000units use increments of 20,000 units
From the data table, sketch a graph with the y-axis scale ranging from 0 to 2,000,000
Identify the break-even point
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Costs and revenuequick questions
Looking at your graph, how many Gloriesmust Bobby produce if he is to break-even?
Define break-even in a single sentence
Reading from your graph, estimate theamount of profit/loss Bobby will make if hemakes and sells:
60,000 Glories
160,000 Glories
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Break-even Simulator (Tutor2u)task
Use the simulator to find the total contribution andnet profit when: Selling price = 50
Variable cost per unit = 26
Fixed costs = 350,000
(Expected output = 15,000 units)
By how much should selling price change if the firmwishes to aim for a net profit of 40,000? What is the margin of safety at that output? What does this
mean?
Management is reluctant to raise price. Why do you think this might be?
How else could they try to achieve this target profit?
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http://www.tutor2u.net/assets/simulations/breakeven_simulator_1.swfhttp://www.tutor2u.net/assets/simulations/breakeven_simulator_1.swf -
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Break-even analysis
2. Calculation
method
PhotobyA.
Morris.
Usedwithpermission
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Calculating break-even
Contribution:Defined as thecontribution that selling a single unitmakes towards fixed costs and profit
Contribution = Price per unit Variable Cost per unit
Break-even point =
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Fixed costs
contribution
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Calculating break-evenExample
You manufacture CDs. You sell them toretailers for 8. The variable cost perCD is 1 and fixed costs are 70,000
What is the break-even output?
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Calculating break-evenExample
A fast-food restaurant sells meals for 6 each The variable costs of preparing and serving
each meal are 2
The monthly fixed costs of the restaurant
amount to 3,600
How many meals must be sold each month tobreak even?
If the restaurant sold 1,500 meals in April,what were the margin of safety and profit inthat month?
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Break-even analysis
Katies Cards
Ph
otobyelle_
rigby.
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sion
n
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Breakeven analysisKaties Cards question
Katie makes greetings cards. She hasestimated that her fixed costs for the first sixmonths of operation would be 3,000. Thevariable cost per card is estimated at 60p,
and Katie set a selling price to retailers of1.80 per card
Showing your working, calculate Katiesbreak-even output for her first six months in
operation If she sells 3,000 cards, how much profit will
she make?
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Photoby
elle_
rigby.
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Break-even analysis
MugUp task
P
hotobyPiddy77.
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Break-even analysisTask MugUp Ltd MugUp Ltd has sufficient capacity to produce 120,000 drinking
mugs per year The variable cost of producing each mug is 20p and fixed costs
total 20,000 per year
The mugs are sold to wholesalers for 60p each
a. Calculate:1. contribution per mug2. break-even output3. the margin of safety if current output is 90,000 mugs4. profits at full capacity
b. Assuming that unit variable costs, fixed costs and capacity
remain unchanged, calculate the price that MugUp would haveto charge wholesalers to obtain the target profit of 40,000 peryear at full capacity output
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Alternative method
http://mugup%20ltd%20qns.pdf/ -
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Break-even analysis
Uses and limitations
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Break-even analysisuses and limitations
Break-even analysis only really works for abusiness with one product
Involves so much simplification as to beworthless
e.g. generalising costs into fixed and variable In reality (but not in exams!) the language of
break-even is more important than themathematics
Break-even point Contribution
Margin of safety
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Cashflow forecasting
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