Unit 2 Business Resources Assignment 6 Date Set: 20 th April 15 Deadline: 4 th May 15

Learning Objective Today’s learning objective is: To be able to use BREAK EVEN analysis to understand why monitoring costs are so important in Business

What is Break Even? Businesses must make a profit to survive To make a profit, sales revenue (income) must be higher than costs. Income£50,000 Costs £40,000 Profit £10,000 Income£50,000 Costs £60,000 Loss - £10,000

The Break-Even Point Variable + fixed costs = Total costs When total costs = sales revenue a business is at BREAK–EVEN POINT. For example: – total sales revenue (money coming in) = £5,000 – total costs (money going out) = £5,000 At this point the business isn’t 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

Drawing a break-even chart 2

Drawing a break-even chart 3

Drawing a break-even chart 4

Identifying the break-even point Loss Profit Break-even point

Using a formula to calculate the break- even point The break-even point = Fixed costs (Selling price per unit minus variable cost per unit) (also known as contribution)

Applying the formula Fixed costs (Selling price per unit minus variable cost per unit) Tom: £100 (£1.50 – 50p) = 100 Ice creams

Margin of Safety is amount by which current output exceeds the level of output to break even If Tom sells 200 ice creams then what is his margin of safety? 100 ice creams MOS

How would an advertising campaign affect BE?

How would a reduction in price affect BE?

Scenario Emma and John own Headliners Hair Salon which is a relatively new business. They are concerned about their financial management of the salon as they know very little about costs and budgeting. They have asked you to put together some information on costs and budgeting and present it to them at the next meeting. Headliners Information for New Beauty Treatment Break even Variable costs  Materials - £2.50 per unit  Labour - £6.50 per unit Selling price - £15.00 per unit Fixed costs (for new treatment) - £12,000 per year Sales Budget January –June 2013 MonthBudgetActualVariance January8,50010,000(1,500) February10,00011,000(1,000) March10,0009,0001,000 April12,50014,500(2,000) May13,00011,5001,500 June13,00015,000(2,000)

TC aspx Break even Template Link

Break Even Analysis for the new beauty product

Using a budget LO – To be able to use variance analysis to analyse a given budget

Starter Task Your parents have decided to go on holiday and have given you £100 to look after the house and the dog for a week. Decide how you will spend the money. LO – To be able to use variance analysis to analyse a given budget

Key features of budgets Budgets are plans for how much money should be spent on various items They normally cover a 12 month period They are broken down into weekly or monthly intervals They are set for each department in a firm The departmental manager is responsible for ensuring that money spent is within budget limits The manager is called the budget holder

Creating a budget Forecast level of activity, eg sales, for the next year Each department then produces a suggested budget based on the forecast Suggested budgets are discussed with senior management, modified and agreed The ‘budget year’ begins and managers receive regular feedback on spending.

Budget plan PRODUCTION DEPARTMENT BUDGET MARCH FEBRUARY 2004 ItemMonthly expenditure £ Sheet aluminium Wheels Tyres Wages Maintenance Electricity Moulds 12,000 8,900 9,500 16,500 4,000 1, Total53,500

Feedback on performance Shortly after the end of the month (or week), the budget holder is given a list of actual expenditure on each item The budget holder compares this with the budgeted amount If there is a major overspend, action must be taken to try to solve the problem Once a budget has been set up, the following events take place:

Budgets and variances The difference between the planned and actual figures is called a variance. A minus sign before the variance shows it is an overspend, eg Budgeted amount: £200 Actual spending: £250 Variance:– £50

Budget report with variances PRODUCTION DEPARTMENT BUDGET REPORT MARCH 2003 ItemMonthly expenditure £ Actual expenditure £ Variance £ Sheet aluminium Wheels Tyres Wages Maintenance Electricity Moulds 12,000 8,900 9,500 16,500 4,000 1, ,250 9,000 9,500 14,000 6,500 1, –250 – ,500 –2,500 –50 50 Total53,50053,850 –350

Budget for Headliners Hair Salon LO – To be able to use variance analysis to analyse a given budget

M4 Analyse the reasons why costs need to be controlled to budget 1. Review the budget above and explain where AND why the variances occurred. 2. Explain what problems (at least 3) for Headliners that have arisen from unmonitored costs and budget. 3. Using the information you have found in 1. and 2. analyse the reasons why costs need to be controlled to budget

D3 Evaluate the problems they have identified from unmonitored costs and budgets. For each problem, explain the potential consequences for Headliners Suggest 3 courses of action Emma and John could take to prevent these problems from occurring again in the future.