Unit 3 Financial Forecasting in Business P4 P5 M2 D1 Break Even
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Transcript of Unit 3 Financial Forecasting in Business P4 P5 M2 D1 Break Even
Unit 3Financial Forecasting
in Business
P4 P5 M2 D1Break Even
P4 P5 M2 D1
The Break Even PointThe Break Even PointThe 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.
P4
Constructing a Break-Even Constructing a Break-Even ChartChart
£
Output
Salesrevenue
TotalCosts
Fixed Costs
Break-evenPoint
Margin of Safety
Number of Units 0 2 4 6 8
Fixed Costs
Variable Costs
Total Costs
Sales Revenue
Break-even Table: based on a price of £2000
Fixed costs are £4000, the variable cost per unit is £1000
4000 400040004000 4000
0
600040002000
4000
8000
80006000
8000 12000 16000
10000 12000
0
4000
Break-Even Chart: Price Break-Even Chart: Price £2000£2000£
Revenue
Number of cakes
Salesrevenue
TotalCosts
Fixed Costs
Break-evenPoint Profit if we sell
6 units = £2000
2 4 6 8
8000
6000
4000
2000
14000
10000
Loss if we onlysell 2 units = £2000
Break evenPoint =4 units
12000
16000
Number of Units 0 1 2 3 4
Fixed Costs
Variable Costs
Total Costs
Sales Revenue
Break-even Table: based on a price of £3000
Fixed costs are £4000, the variable cost per unit is £1000
4000 400040004000 4000
0
300020001000
4000
4000
60005000
6000 9000 12000
7000 8000
0
3000
Break-Even Chart: Price Break-Even Chart: Price £3000£3000£
Revenue
Number of cakes
Salesrevenue
TotalCosts
Fixed Costs
Break-evenPoint
1 2 3 4
6000
3000
9000
12000
Break evenPoint =2 units
Margin of Safety (1 cake)
What happened to the break-even 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.
Now draw a break even graph using the
figures from the Max’s Cartoon Cakes.
P5
Break Even Graph: Max
Fixed costs per year: £7920Price per cake: £7.50Variable cost per cake: £3.79Plot:Fixed costsTotal costsSales RevenueLabel BEP: where sales revenue crosses
the total costs line
P5
Break Even Graph: Max
500 1000 1500 2000 2500 3000
FC
VC
TC
SR
7920 7920 7920 7920 7920 7920
1895 3790 5685 7580 9475 11370
9815 11710 13605 15500 17395 19290
3750 7500 11250 15000 18750 22500
Break-Even Chart: Price Break-Even Chart: Price £7.50£7.50£
Revenue
Number of cakes
Salesrevenue
TotalCosts
Fixed Costs
Break-evenPoint
Break evenPoint =?? units
Margin of Safety (??? cakes)
500 1000 1500 2000 2500 3000
5000
10000
15000
20000
25000
Margin of Safety
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 = ?
P5
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
Calculating how many products we need to sell in order to break even and cover our costs.
Formula:
Fixed CostsContribution (Price – Variable cost)
P4
Use the break-even formula to work out the break-even point for questions 1-5 below
Fixed CostsContribution (Price – Variable cost)
1. Fixed cost = £20,000, price = £4,000, variable cost = £2,000
2. Fixed cost = £10,000, price = £4,000, variable cost = £2,000
3. Fixed cost = £26,000, price = £5,000, variable cost = £3,000
4. Fixed cost = £50,000, price = £20,000, variable cost = £10,000
5. Fixed cost = £1,000, price = £800, variable cost = £300
20,000 / 2,000 = 10
26,000 / 2,000 = 13
10,000 / 2,000 = 5
50,000 / 10,000 = 5
1,000 / 500 = 2
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.
P4
Using the Break Even Formula
Fixed CostsPrice – Variable Cost
1. Fixed cost = £600, price = £400, variable cost = £100
2. Fixed cost = £10, price = £3, variable cost = £1
3. Fixed cost = £260, price = £50, variable cost = £30
4. Fixed cost = £50,000, price = £4,000, variable cost = £2,000
5. Fixed cost = £1,000, price = £400, variable cost = £200
600 / 300 = 2
50,000 / 2,000 = 25
10 / 2 = 5
260 / 20 = 13
1,000 / 200 = 5
P4
Break Even Report
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?
P4
Revision of Break Even1. Costs that do not change with output are called?2. Flour, eggs and cream are examples of which type
of cost?3. Which two lines cross on a break even graph to
show the break even point?4. How do you calculate total costs?5. Sales revenue = Number of cakes sold x ?6. The difference between the number of cakes
produced and the break even point is called?1. Fixed2. Variable3. Sales revenue and total costs4. Fixed costs + Variable costs5. Price6. Margin of Safety
Demonstrate the impact of changing cost and
revenue data on the break even point of a selected
business.
M2
Complete the worksheet:“M2 Changing Cost Revenue on BEP
Worksheet.doc”.
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?
M2
Formula to calculate the break even point
Fixed Costs
Price – Variable Cost
1. Calculation using the original figures
79207.50 – 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
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.
M2
How Max can improve the BEP
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.
M2
The Impact of Changing Costs and Revenue on the Break Even Point for
MaxThe 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 …………………………………………………………………
M2
Increase in Fixed CostsIncrease in Fixed Costs£Revenue
Number of cakes
Sales revenue
Total Costs
Fixed Costs
500 1000 1500 2000 2500 3000
5000
10000
15000
20000
25000
Fixed Costs
Total Costs
Increase in Variable CostsIncrease in Variable Costs£Revenue
Number of cakes
Sales revenue
Total Costs
Fixed Costs
500 1000 1500 2000 2500 3000
5000
10000
15000
20000
25000Total Costs
Increase in PriceIncrease in Price£Revenue
Number of cakes
Sales revenue
Total Costs
Fixed Costs
500 1000 1500 2000 2500 3000
5000
10000
15000
20000
25000
Sales revenue
How Max can improve the BEP
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.
M2
The Importance of Break Even
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
D1
Benefits of Break Even
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
D1
Limitations of Break Even
• 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
D1
Importance of Break Even:Conclusion
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
D1
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”