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    Break Even Analysis

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    suchipatel
    This document discusses break-even analysis and how to calculate the break-even point. It uses an example of Tom running an ice cream stand to illustrate the concepts. There are fixed costs like van rental that must be paid regardless of sales. Variable costs like ingredients increase with each item sold. The break-even point is where total costs equal total revenue, so there is no profit or loss. The document shows how to draw break-even charts and uses Tom's example numbers to calculate that he needs to sell 100 ice creams to cover his £100 fixed costs given a 50p variable cost per item and £1.50 selling price.

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    Break Even Analysis

    Uploaded by

    suchipatel
    1K views13 pages
    This document discusses break-even analysis and how to calculate the break-even point. It uses an example of Tom running an ice cream stand to illustrate the concepts. There are fixed costs like van rental that must be paid regardless of sales. Variable costs like ingredients increase with each item sold. The break-even point is where total costs equal total revenue, so there is no profit or loss. The document shows how to draw break-even charts and uses Tom's example numbers to calculate that he needs to sell 100 ice creams to cover his £100 fixed costs given a 50p variable cost per item and £1.50 selling price.

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    finance BEP

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    This document discusses break-even analysis and how to calculate the break-even point. It uses an example of Tom running an ice cream stand to illustrate the concepts. There are fixed costs like van rental that must be paid regardless of sales. Variable costs like ingredients increase with each item sold. The break-even point is where total costs equal total revenue, so there is no profit or loss. The document shows how to draw break-even charts and uses Tom's example numbers to calculate that he needs to sell 100 ice creams to cover his £100 fixed costs given a 50p variable cost per item and £1.50 selling price.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    1K views13 pages

    Break Even Analysis

    Uploaded by

    suchipatel
    This document discusses break-even analysis and how to calculate the break-even point. It uses an example of Tom running an ice cream stand to illustrate the concepts. There are fixed costs like van rental that must be paid regardless of sales. Variable costs like ingredients increase with each item sold. The break-even point is where total costs equal total revenue, so there is no profit or loss. The document shows how to draw break-even charts and uses Tom's example numbers to calculate that he needs to sell 100 ice creams to cover his £100 fixed costs given a 50p variable cost per item and £1.50 selling price.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 13
    At a glance
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    The key takeaways are that businesses need to make a profit to survive by having income exceed costs, and there are two types of costs: variable and fixed.

    The two types of costs are variable costs, which increase with each additional product sold, and fixed costs, which must be paid even if no products are sold.

    The break-even point is when total costs equal total sales revenue, meaning the business is neither making a profit nor loss.

    Calculating a

    break-even point
    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 50,000
    Costs 40,000
    Profit 10,000
    Income 50,000
    Costs 60,000
    Loss 10,000
    The basics of break-even
    analysis 2
    There are two types of costs:
    Variable costs increase by a step every
    time an extra product is sold (eg cost of
    ice cream cornets in ice cream shop)
    Fixed costs have to be paid even if no
    products are sold (eg rent of ice cream
    shop)
    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.

    Why calculate break-even?
    Tom can hire an ice-cream van for an afternoon
    at a summer fete. The van hire will be 100 and
    the 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 to
    cover his costs?
    Calculating this will help Tom to decide if the idea
    is worthwhile.
    Drawing a break-even chart 1
    Tom's ice creams
    0
    50
    100
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    0 100 200 300
    Number sold
    C
    o
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    u
    e

    Drawing a break-even
    chart 2
    Tom's ice creams
    0
    50
    100
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    0 100 200 300
    Number sold
    C
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    Fixed Cost
    Drawing a break-even
    chart 3
    Tom's ice creams
    0
    50
    100
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    0 100 200 300
    Number sold
    C
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    Total Cost
    Fixed Cost
    Drawing a break-even
    chart 4
    Tom's ice creams
    0
    50
    100
    150
    200
    250
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    350
    400
    450
    0 100 200 300
    Number sold
    C
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    e

    Sales Revenue
    Total Cost
    Fixed Cost
    Identifying the break-
    even point
    Tom's ice creams
    0
    50
    100
    150
    200
    250
    300
    350
    400
    450
    0 100 200 300
    Number sold
    C
    o
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    Sales Revenue
    Total Cost
    Fixed Cost
    Loss
    Profit
    Break-even point
    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:
    Using a formula to calculate
    the break-even point
    The 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)
    Applying the formula
    Fixed costs
    (Selling price per unit minus variable cost per unit)
    Tom: 100
    (1.50 50p)
    = 100

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