Break-Even Very important concept for the exam For some of you it will be building on prior knowledge.

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Presentation transcript:

Break-Even Very important concept for the exam For some of you it will be building on prior knowledge

Lesson Objectives – Next 2 lessons Understand the meaning of break-even. Ability to calculate break-even: 1.Using the contribution method (calculation) 2.Using break-even charts

Key terms from last lesson: Total Variable costs = variable costs x output level Total costs = Fixed costs + variable costs Total revenue = price per unit x sales

What is break even? In other words profit = 0 To make a profit, revenue must be higher than costs. “A business breaks even if it doesn’t make a profit or a loss”

Calculating the break even point The two ways to calculate the break even point: 1. The CONTRIBUTION METHOD. 2. CREATING A BREAK EVEN CHART.

The Contribution Method

This involves a two part calculation: 1. Selling Price per unit – variable cost per unit = contribution AND 2. Fixed costs divided by contribution = Break even point.

Contribution Method - Example Fixed costs = £2000, variable costs = £8 per unit, Selling price per unit =£10. Then break even would be: 1. Price per unit – variable cost per unit = contribution £10- £8= £2 (Contribution towards fixed costs) 2. Fixed costs divided by contribution = Break even point. £2000 divided by 2 = products will need to be sold in order to break even and cover all their costs.

Task – Calculate the following the break even points using the contribution method [1]Fixed costs£3000 Selling Price£300 Variable Cost£100 [2]A business has the following costs: Rent£100 per month Insurance £30 per month Salaries£350 per month Raw materials£6 Their selling price: £9

Break even revenue This is calculated by multiplying break even output by selling price

Task A business making t-shirts has the following costs: Fixed Costs£50,000 per year Variable Costs£3.70 per t-shirt Selling Price£12 each [a]Calculate the break-even point? [b]What would be the revenue as breakeven?

Plenary Basically contribution is the calculation: SELLING PRICE PER UNIT – VARIABLE COST PER UNIT (just remember this for your exam, if you are asked to CALCULATE breakeven!)