Transcript Unit 3 - Brighouse High School

M2
D1
Unit 3
Financial Forecasting in
Business
P4
P5
P4 P5 M2 D1
Break Even
The Break Even Point P4
The number of cakes Max needs to sell in
order to pay all the costs of running his
business.
Why calculate the break even
point?
• So Max knows how many cakes he has to
sell each year in order for the business
to survive
• Once he has reached his break even
point, he then knows all sales after that
will be profit.
Constructing a Break-Even Chart
Sales
revenue
£
Total
Costs
Break-even
Point
Fixed
Costs
Margin of Safety
Output
Break-even Table: based on a
price of £2000
Number of
Units
Fixed Costs
Variable Costs
Total Costs
Sales Revenue
0
2
4
6
8
4000
4000
4000
4000
4000
4000
6000
8000
6000
8000
10000 12000
4000
8000
12000
0
4000
0
2000
16000
Fixed costs are £4000, the variable cost per unit is £1000
Break-Even Chart: Price £2000
£
Revenue
Sales
revenue
16000
14000
Total
Costs
12000
10000
Break-even
Point
8000
6000
Profit if we sell
6 units = £2000
Loss if we only
sell 2 units = £2000
4000
Fixed
Costs
2000
2
4
6
Break even
Point =
4 units
8
Number of cakes
Break-even Table: based on a
price of £3000
Number of
Units
Fixed Costs
Variable Costs
Total Costs
Sales Revenue
0
1
2
3
4
4000
4000
4000
4000
4000
2000
3000
4000
5000
6000
7000
8000
3000
6000
9000
12000
0
4000
0
1000
Fixed costs are £4000, the variable cost per unit is £1000
Break-Even Chart: Price £3000
£
Revenue
12000
Sales
revenue
9000
Total
Costs
Break-even
Point
6000
Break even
Point =
2 units
Fixed
Costs
3000
Margin of Safety (1 cake)
1
2
3
4
Number of cakes
What happened to the breakeven point when Max increased
his price from £2,000 to
£3,000?
Break-even point fell from 4
to 2. He did not have to sell
as many cakes in order to
break even.
P5
Now draw a break even
graph using the figures
from the Max’s
Cartoon Cakes.
Break Even Graph: Max
Fixed costs per year:
£7920
Price per cake:
£7.50
Variable cost per cake:
£3.79
Plot:
Fixed costs
Total costs
Sales Revenue
Label BEP: where sales revenue crosses
the total costs line
P5
Break Even Graph: Max
500
1000
1500
2000
2500
3000
FC
7920
7920
7920
7920
7920
7920
VC
1895
3790
5685
7580
9475
11370
9815
11710 13605
15500
17395 19290
3750
7500
15000
18750 22500
TC
SR
11250
Break-Even Chart: Price £7.50
£
Revenue
Sales
revenue
25000
20000
Total
Costs
Break-even
Point
Break even
Point =
?? units
15000
10000
Fixed
Costs
5000
Margin of Safety (??? cakes)
500
1000
1500 2000 2500 3000
Number of cakes
Margin of Safety
P5
The difference between the number of
cakes Max would like to produce and
sell, and the break even point. Max
thinks he will sell 2160 cakes every
year.
Margin of Safety for Max:
2160 – Break Even Point
=
?
Break Even Report
Follow the format on your worksheet.
Before Question 4, put a heading:
a) Graph
P4
Calculating the break-even
point without a graph
P4
Calculating how many products we need
to sell in order to break even and
cover our costs.
Formula:
Fixed Costs
Contribution (Price – Variable cost)
Use the break-even formula to work out the
break-even point for questions 1-5 below
Fixed Costs
Contribution (Price – Variable cost)
1.
2.
3.
Fixed cost = £20,000, price = £4,000, variable cost = £2,000
20,000 / 2,000 = 10
Fixed cost = £10,000, price = £4,000, variable cost = £2,000
10,000 / 2,000 = 5
Fixed cost = £26,000, price = £5,000, variable cost = £3,000
26,000 / 2,000 = 13
4.
Fixed cost = £50,000, price = £20,000, variable cost = £10,000
5.
Fixed cost = £1,000, price = £800, variable cost = £300
50,000 / 10,000 = 5
1,000 / 500 = 2
P4
Using “P4 Break Even
Calculation Worksheet.doc”,
calculate the break even
points.
Complete the calculation at
the bottom of the page for
Max’s Cartoon Cakes.
Using the Break Even Formula
Fixed Costs
Price – Variable Cost
1.
Fixed cost = £600, price = £400, variable cost = £100
600 / 300 =
2.
Fixed cost = £10, price = £3, variable cost = £1
5
10 / 2 =
3.
Fixed cost = £260, price = £50, variable cost = £30
260 / 20 =
4.
2
13
Fixed cost = £50,000, price = £4,000, variable cost =
£2,000
50,000 / 2,000 =
5.
25
Fixed cost = £1,000, price = £400, variable cost = £200
1,000 / 200 =
5
P4
Break Even Report
P4
b) Using a Formula
•
•
•
•
What is the formula used to calculate the
break even point?
Show the calculations for Max
What is Max’s break even point using the
formula
Compare this to your graph – which
calculation do you think is more accurate and
why?
Revision of Break Even
1.
2.
3.
4.
5.
6.
1.
2.
3.
4.
5.
6.
Costs that do not change with output are called?
Flour, eggs and cream are examples of which type of
cost?
Which two lines cross on a break even graph to show
the break even point?
How do you calculate total costs?
Sales revenue = Number of cakes sold x ?
The difference between the number of cakes
produced and the break even point is called?
Fixed
Variable
Sales revenue and total costs
Fixed costs + Variable costs
Price
Margin of Safety
M2
Demonstrate the impact of
changing cost and revenue
data on the break even point
of a selected business.
Complete the worksheet:
“M2 Changing Cost Revenue on BEP
Worksheet.doc”.
M2
Using the worksheet, write a
report explaining the effect on
Max if costs and revenue change
in his business. Show all the
calculations and figures. How can
Max improve his break even point?
Formula to calculate the
break even point
Fixed Costs
Price – Variable Cost
1. Calculation using the
original figures
7920
7.50 – 3.79
1. Break Even Point
2135 cakes
2. Increase in Fixed Costs
Insert an increase in Fixed Costs:
£8000
2. Increase in Fixed Costs
Re-calculate the new Break Even Point.
Write down one reason for the possible
change in the fixed costs.
Explain the impact on the break even
point when the fixed costs increased.
3. Increase in Variable Costs
Insert an increase in variable
costs:
£5.00
3. Increase in Variable Costs
Re-calculate the new Break Even Point.
Write down one reason for the possible
change in the variable costs.
Explain the impact on the break even
point when the variable costs
increased.
4. Increase in Price
Insert an increase in variable
costs:
£8.00
4. Increase in Price
Re-calculate the new Break Even Point.
Write down one reason for the possible
change in the price.
Explain the impact on the break even
point when the price increased.
Effect on the BEP if costs or
revenue change
M2
If fixed costs or variable costs increase,
the BEP will increase – the firm will have
to sell more products to cover their
costs.
If the selling price is increased, the BEP
will decrease – the total revenue will
increase so the firm can sell less
products to cover their costs.
How Max can improve the BEP
M2
1. Increase the price of the product.
The firm will receive more revenue
and will have to sell less products in
order to break even.
2. Decrease the fixed or variable
costs. The total costs will then be
lower so the firm will have to sell
less products in order to break
even.
The Impact of Changing Costs and
Revenue on the Break Even Point for Max M2
The original break even point for Max was ………… cakes.
Increase in Fixed Costs
If Max increased his fixed costs to £8,000, the calculation for the BEP would
be:
………………………………………
The new break even point would be: ……………
A possible reason for a change in the fixed costs is ...........................................
The impact on the BEP is that it has changed from ................to ................
To improve this BEP, Max will have to …………………………………………………………………
£
Revenue
Increase in Fixed Costs
Sales revenue
Total Costs
25000
Total Costs
20000
15000
10000
Fixed Costs
Fixed Costs
5000
500
1000
1500 2000 2500 3000
Number of cakes
£
Revenue
Increase in Variable Costs
Sales revenue
Total Costs
25000
Total Costs
20000
15000
10000
Fixed Costs
5000
500
1000
1500 2000 2500 3000
Number of cakes
Increase in Price
£
Revenue
Sales revenue
Sales revenue
25000
Total Costs
20000
15000
10000
Fixed Costs
5000
500
1000
1500 2000 2500 3000
Number of cakes
How Max can improve the BEP
M2
1. Increase the price of the product.
The firm will receive more revenue
and will have to sell less products in
order to break even.
2. Decrease the fixed or variable
costs. The total costs will then be
lower so the firm will have to sell
less products in order to break
even.
The Importance of Break Even
D1
Report must include:
• Detailed explanation of the benefits of
break-even calculations – with examples
• Detailed explanation of the limitations
of break-even calculations – with
examples
• Overall, do you think Max should
calculate the break even point? Give
detailed reasons for your decision
Benefits of Break Even
D1
1. Know how many cakes need to be sold –
give example
2. Know whether the business will make a
profit or loss – give an examples
3. Can take action if he knows he is not on
target to reach the break even point –
give an examples
4. Can decide on his “margin of safety” –
give an example
Limitations of Break Even D1
• When his costs change so the BEP will
change – give an example
• If he changes his price, the BEP will
change – give an example
• The system presumes that the cakes
will be sold. This may not happen – give
an example
Importance of Break Even:
Conclusion
D1
Overall, do you think Max should calculate the break
even point? Using the work you have already written,
give your opinion and fully justify your answer.
Consider:
• Do the benefits outweigh the limitations?
• Is it essential for Max to know how many cakes he
needs to sell to cover his costs?
• What might be the consequences if he did not know
his BEP?
• The graph is tricky to produce but the formula is easy
to use – Max could set this up on a spreadsheet
Instructions for the
spreadsheet
• Explain in your work that Max could use a
spreadsheet to calculate his BEP
• Insert a screenshot of the spreadsheet
showing the formula and label
• Insert a screenshot of the spreadsheet and
label
• Change either the price, fixed cost or variable
cost on the spreadsheet
• Insert a screenshot showing the change you
made. Label the screenshot and explain what
happened to the BEP.
• Summarise why using a spreadsheet is a good
idea for Max
Work for Today …
• Complete D1 work including the instructions
for the spreadsheet
• Load “Break Even Worksheet Table for
Max.doc” from Unit 3
• Copy figures onto the table and replace with
hand written copy in work.
• Design a title page for work: “Break Even”