Transcript (Calculating Break-Even) Explain break-even point. Calculate break-even point for a business operation. Pricing LAP 4 Explain break-even point. Lemons Water Stirrers Sugar Ice Cups Lemonade 50¢  Childhood lemonade stand Breaking even = important for businesses • Who provided your.

(Calculating Break-Even)
Explain break-even point.
Calculate break-even point
for a business operation.
Pricing LAP 4
Explain break-even point.
Lemons
Water
Stirrers
Sugar
Ice
Cups
Lemonade 50¢
 Childhood
lemonade
stand
Breaking even
= important
for
businesses
• Who provided your materials?
 Must
abledid
toyou
cover
costs
• Howbe
much
charge?
• Didhopefully—make
you break even? a profit!
 And
Breaking Even

Art club bake sale
• $.75 per dessert item
• $12 in costs

• The club breaks even
after selling 16 items.
Break-even point = when the club makes
enough money to cover costs and
begins to make a profit
• No loss, no gain
• Will earn profit as
costs stay the same

Businesses reach break-even
point when total sales income
at a given selling price
equals total costs.

Must calculate total costs
and estimate sales
revenues to project
break-even point
Costs
 Predictable business costs
that don't change when sales
go up or down such as:
• Taxes
• Rent or mortgage payments
• Equipment payments
or leases
• Wages and salaries
• Depreciation of physical assets
• Fees and licenses
• Interest on loans
• Insurance
Costs
 Costs that change along with
changes in sales volume
 If sales go up, these costs increase.
 If sales go down, these costs decrease.
•
•
•
•
Shipping
Supplies
Cost of goods
Promotional costs
•
•
•
•
Sales tax
Raw materials
Business travel
Sales commissions
Components of Break-Even
Costs
Semivariable costs
 Vary to some extent
in response to sales
 Should be assigned as
either fixed or variable
for the purpose of
calculating break-even
Components of Break-Even
Sales revenues
 Most businesses receive the bulk of their income
from sales revenues.
 Two ways that sales
revenues increase:
• As the number of
units sold increases
• As the selling price
per unit increases
Profit and Loss

A business does not make a profit until it has
passed the break-even point.

This occurs when total
sales revenues are greater
than total costs.

A business loses money
if it does not reach its
break-even point and
sales revenues are
less than total costs.
 To determine when the business
will begin making a profit

To help set prices
 To determine whether to relocate
the business

To determine capital needs
 To determine what incentives
to offer
Calculate break-even point for
a business operation.
• BP—break-even point
• FC—total fixed costs
• VCM—variable-cost margin
•
Formula—BP = FC ÷ VCM
•
Break-even equals total fixed costs divided
by the variable-cost margin.

The amount that each sale contributes
to fixed costs

Also called the fixed-cost contribution

Calculated by subtracting variable costs
per unit from the selling price per unit
Step 1—Identify costs and revenues.
Step 2—Classify costs as fixed or variable.
Step 3—Total the costs in each classification.
Step 4—Calculate the variable cost per unit.
Step 5—Subtract the variable cost per unit from the selling
price per unit to obtain the variable-cost margin.
Step 6—Divide the total fixed costs by the variable-cost margin
to determine break-even.
 Using break-even to determine
sales commissions
 Darius' company
• Deciding between 5% and 7%
• No written agreements
• Is it ethical to change the rate?
Acknowledgments
Original Developers:
Sarah Bartlett Borich
and Lelia Ventling, MarkED
Version 1.0
MarkED Resource Center
Copyright © 2007
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