Costs and Breakeven Slides
Transcript of Costs and Breakeven Slides
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Calculating abreak-even point
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The basics of break-even
analysis 1 Businesses must make a profit to survive To make a profit, income must be higher than
expenditure (or costs)
Income 50,000Costs 40,000
Profit 10,000
Income 50,000Costs 60,000
Loss 10,000
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The basics of break-even
analysis 2There are two types of costs: Variable costs increase by a step every
time an extra product is sold (eg cost ofice cream cornets in ice cream shop)
Fixed costs have to be paid even if noproducts are sold (eg rent of ice cream
shop)
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The break-even point Variable + fixed costs = total costs When total costs = sales revenue, this is
called the break-even point, eg total costs = 5,000 total sales revenue = 5,000
At this point the business isnt making a
profit or a loss it is simply breaking even.
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Why calculate break-even?
Tom can hire an ice-cream van for an afternoonat a summer fete. The van hire will be 100 andthe cost of cornets, ice cream etc will 50p per
ice cream.Tom thinks a sensible selling price will be 1.50.
At this price, how many ice-creams must he sell tocover his costs?
Calculating this will help Tom to decide if the ideais worthwhile.
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Drawing a break-even chart 1
Tom's ice creams
050
100
150
200
250
300350
400
450
0 100 200 300
Number sold
C
ost/Revenue
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Drawing a break-even
chart 2Tom's ice creams
0
50
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0 100 200 300
Number sold
Co
st/Revenue
Fixed Cost
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Drawing a break-even
chart 3Tom's ice creams
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50
100
150
200
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0 100 200 300
Number sold
Co
st/Revenue
Total Cost
Fixed Cost
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Drawing a break-even
chart 4Tom's ice creams
0
50
100
150
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250
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0 100 200 300
Number sold
C
ost/Revenu
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Sales Revenue
Total Cost
Fixed Cost
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Identifying the break-
even pointTom's ice creams
0
50100
150
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0 100 200 300
Number sold
Cos
t/Revenue
Sales Revenue
Total Cost
Fixed CostLoss
Profit
Break-even point
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Examples of costs
Variable: materials, labour, energy Fixed: rent, business rates, interest on
loans, insurance, staff costs (e.g. security)
These vary, depending upon the type of business.Typical costs include:
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Using a formula to calculate
the break-even pointThe break-even point =
IMPORTANT: No need to learn this.The formula is given on the
assessment paper if you need it.
Fixed costs
(Selling price per unit minus variable cost per unit)
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Applying the formulaFixed costs
(Selling price per unit minus variable cost per unit)
Tom: 100
(1.50 50p) = 100