Starter

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Log on to the above website and click on Green Tick for Business.

Complete the questionnaire!

BREAK-EVEN POINTS

Part 6

Starter

1. What is the definition of the break-even point? 1 mark

2. What 3 pieces of information do you need to calculate the break even point?

1 mark

3. What is the formula used to calculate the break-even point?1 mark

4. Your selling price per unit is £23, your variable costs per unit are £7 and your fixed costs are £12000. Use these to calculate the break-even point.

2 marks

Now you will mark each others!

Lesson Objective

To show the effect on break-even if revenues or costs change.

The Effect on Break-even if Revenues or Costs change

When we calculate the break-even point we do so using estimations:

What we expect the selling price per unit to be.

What we expect the variable price per unit to be.

What we expect the fixed costs to be.

There are many reasons why our estimations may prove wrong.

Activity 1

Activity 2

Complete the following:

Remember, we will always round up the Break-even point if it is not an exact amount!

Examples

The planned selling price of a product is £50. The planned fixed costs of a unit are £1000. The planned variable costs per unit are £20.

The expected break-even point (rounded up) is: £1000 / (£50-£20) = 34 units

If our fixed costs increase to £1200, the effect on the break-even point is:

£1200 / (£50-£20) = 40 units

If our fixed costs remain at £1000, but our variable costs increase to £30, the effect is:

£1000 / (£50-£30) = 50 units

If the costs remain as expected, but we reduce our selling price to £30, the effect is:

£1000 / (£30-£20) = 100 units

Activity 3 – Your turn!

a) £1000 / (£80-£30) = £1000 / £50 = 20 unitsb) £1200 / (£80-£30) = £1200 / £50 = 24 unitsc) £1000 / (£80-£50) = £1000 / £30 = 34 unitsd) £1000 / (£50-£30) = £1000 / £20 = 50 unitse) Surplus stock to clear + lack of interest at higher price

Activity 3

A) Break-even =

= 700 pairs of jeans

B) 1000 jeans = (£15 x 1000) – ((£10 x 1000) + £3500) = £15,000 - £13,500

= £1500 profit

B) 500 jeans = (£15 x 500) – ((£10 x 500) + £3500) = £7500 - £8500

= -£1000 loss

(£1200 + £800 + £1500)

£15 – (£4 + £6)

Activity 4

In an earlier activity, you were told:

Break-even =

= 700 pairs of jeans

(£1200 + £800 + £1500)

£15 – (£4 + £6)

Answers

a) £4000 / (£15-£10) = 800 unitsb) £4000 / (15 - £12) = 1334 unitsc) £4000 / (£20-£10) = 400 units

Recap Lesson Objectives:

To show the effect on break-even if revenues or costs change.