Transcript File - LPS Business DEPT

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?
TOPIC B.1 UNDERSTAND THE
PLANNING TOOLS BUSINESSES USE
TO PREDICT WHEN THEY WILL START
TO MAKE A PROFIT
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 breakeven
BREAKEVEN

Breakeven is when a business has enough revenue from
sales to cover the costs of making the products

The 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 revenue
TR > TC
TR = TC
TR < TC
Can you
explain these
emotions?
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-shirts
BREAKEVEN CHARTS – THE BUILD UP
Fixed costs stay the same and are therefore a
___________ ___________ line.
£
No of items
Variable costs change in relation to the
number of items produced and therefore start
at ____ and slope __________.
£
No of items
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
BREAKEVEN CHARTS – THE BUILD UP
Total Revenue increases with the amount of units sold
and therefore starts at ______ and slopes ________ .
£
No of items
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).
BREAKEVEN CHARTS – THE BUILD UP
TR
TC
Costs and
revenues
£
VC
FC
0
Units
BREAKEVEN CHARTS
TR
TC
Costs and
revenues
£
Breakeven point
FC
0
Units
BREAKEVEN CHART
Break Even Chart for T-shirts
40000
35000
30000
£
25000
Fixed Costs
Variable Costs
20000
Total Costs
Revenue
15000
10000
5000
0
0
1000
2000
No of units
1.
2.
3.
4.
5.
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?
3000
USING A BREAKEVEN CHART

As 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 safety
BREAKEVEN CHARTS
TR
TC
Costs and
revenues
£
FC
0
Units
BREAKEVEN CHART
Break Even Chart for T-shirts
40000
35000
30000
£
25000
Fixed Costs
Variable Costs
20000
Total Costs
Revenue
15000
10000
5000
0
0
1000
2000
3000
No of units
1. What is the breakeven level of output?
2. Actual output is 3000 units. What is the margin of safety?
USING A BREAKEVEN CHART

As 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 output
BREAKEVEN CHARTS
TR
TC
Costs and
revenues
£
FC
0
Units
BREAKEVEN CHARTS
£
TR
TR3
TR3 >TC3
= Profit
TC
TC3
TC2 = TR2
= BEP
TC1
TC1>TR1
= Loss
TR1
Q1
Q2
No of items
Q3
BREAKEVEN CHART
Break Even Chart for T-shirts
40000
35000
30000
£
25000
Fixed Costs
Variable Costs
20000
Total Costs
Revenue
15000
10000
5000
0
0
1000
2000
3000
No of units
1.
2.
3.
4.
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?
BREAKEVEN
Why might a start-up business be satisfied if it breaks
even in its first year?
Statement
Fixed cost is a horizontal straight
line
Total 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 rise
True or false Explain your answer
CALCULATING BREAKEVEN

Breakeven can be calculated using the following
formula:
fixed costs
selling price per unit – variable cost per unit
In the examination the formula will be given to
you.
CALCULATING BREAKEVEN
fixed costs
selling price per unit – variable cost per unit
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?
CALCULATING BREAKEVEN
fixed costs
selling price per unit – variable cost per unit
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
£47 - £22
Step 2: £10 000
£25
Step 3: 400 desks
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 chart
Step 1: Complete the table below
Desks
0
200
400
600
FC
VC
TC
TR
Step 2: plot the total cost and total revenue line on graph paper
Step 3: label the breakeven point
QUESTION TIME
1 MARK
fixed costs
selling price per unit – variable cost per unit
A business manufactures rocking horses.
The table shows their predicted figures for the next year.
£
Selling price per rocking horse
100
Variable cost per rocking horse
40
Fixed costs
12 000
How many rocking horses do they need to sell to
breakeven?
rocking horses
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
1. What is meant by the term ‘breakeven’?
(2 marks)
2. Calculate Kristen’s breakeven point.
(4 marks)
3. Will Kristen be able to take some money out of the business?
Justify your answer.
(3marks)
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
suppliers
 Can calculate predicted profit or loss
 Can help make decisions about what price to
charge
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 point
 Decisions re price may be wrong as ill
informed
VARIABLES CHANGE!


A breakeven chart shows costs and revenues but
what happens if theses change?
What variables might change?

Fixed Costs




Variable Costs




Landlord puts rent up
Bank changes interest rates
Management want pay increase
Raw materials change in price
Minimum wage is increased
Utility companies change price
Selling Price


New competition therefore forced to lower price
Positive word of mouth puts demand up
Work in
pairs to
explain
what would
happen to
breakeven
in each
instance.
BREAKEVEN CHARTS – CHANGING VARIABLES –
WHAT WOULD HAPPEN IF FIXED COSTS ROSE?
TR
TC
Costs and
revenues
£
FC
0
Units
BREAKEVEN CHARTS – CHANGING
VARIABLES – RISE IN FIXED COSTS
TR
TC
Costs and
revenues
£
FC
0
Units
BREAKEVEN CHARTS – CHANGING VARIABLES –
WHAT WOULD HAPPEN IF VARIABLE COSTS
FELL?
TR
TC
Costs and
revenues
£
FC
0
Units
BREAKEVEN CHARTS – CHANGING
VARIABLES – VARIABLE COSTS FALL
TR
TC
Costs and
revenues
£
FC
0
Units
BREAKEVEN CHARTS – CHANGING VARIABLES –
WHAT WOULD HAPPEN IF THERE WAS A NEW
COMPETITOR AND PRICE WAS LOWERED?
TR
TC
Costs and
revenues
£
FC
0
Units
BREAKEVEN CHARTS – CHANGING
VARIABLES – LOWER PRICE
TR
TC
Costs and
revenues
£
FC
0
Units
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 analysis
Analyse and explain the risk of not completing a breakeven
analysis
Present information on a breakeven chart
Analyse the effect of changes to breakeven
Try the test
yourself quiz
number 3