Revenues, Costs & Profit KEY TERMS Fixed Costs Variable Costs Revenue Profit

Question Will I make a profit? I buy 20 iPod’s for £1600 and sell them for £79.99 each Will I make a profit?

Break Even Point The point at which Total Costs is exactly equal to Total Revenue What are Costs and Revenues? Come up with a definition for each

Profit? So what is PROFIT?

Understanding Costs and Revenues Cost/Revenue Description Variable Cost Costs which change in direct proportion to sales Fixed Cost Costs which stay the same regardless of how much you sell Total Cost Variable Costs + Fixed Costs Revenue The money which comes into the business from sales

Break Even Analysis

Contribution Contribution: The amount of money each unit sold contributes to pay for the fixed costs of the business. Contribution = selling price - variable cost per unit E.g. a product sells for £15 and has variable costs per unit of £11. Each unit sale therefore makes a contribution of £4 towards fixed costs of business. If business had fixed costs of £20,000, then it would need to sell 5,000 units (£4 x 5,000 = £20,000 contribution) in order to break even

Importance of the Break-even Point Contribution from every unit sold above breakeven point adds to profit Breakeven point provides a focus for business Also helps it work out whether forecast sales will be enough to produce a profit and whether further investment in product is worthwhile. How calculated Number of units needed to break even is calculated by: FIXED COSTS CONTRIBUTION

Limitations of Break-even Charts Do not take into account possible changes in costs over time period Do not allow for changes in selling price Analysis only as good as quality of information Do not allow for changes in market conditions in time period – e.g. entry of new competitor

Why is it desirable to have a healthy margin of safety? The margin of safety The margin of safety is the number of sales above the break-even point, or the range of output over which a profit can be made. A business can check its margin of safety with the following formula: Margin of safety = It’s desirable to have a healthy margin of safety as the sales levels need to ideally be high enough for the business to not only cover its costs but make a profit as well. Photo © 2006 Jupiterimages Corporation Actual output - break-even output Why is it desirable to have a healthy margin of safety?