Break Even Analysis 1.

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Presentation transcript:

Break Even Analysis 1

Fixed costs, no change!

Sales over time go up, but how do we know if we are making a profit?

Sales meet fixed costs

So where is the profit?

A better example

1

Break-even quantity (need to sell!) BEQ = Fixed costs / (Average price per unit – average cost per unit) Example. Turning a jewelry-making hobby into a business. You have $1,000 per month of fixed costs (studio rent, utilities, equipment, etc.). Your variable costs for each necklace are $50 for materials and labour. You'd like to charge $70 per necklace, since that's what similar pieces are selling for. BEQ = $1000 / ($70 – $50) = $1000 / $20 = 50

At $80.00 Use your break-even formula to compare different pricing strategies. For instance, if you raised the price to $80, you'd only need to sell 33 necklaces—but it might be harder to attract buyers.

At $60.00 On the other hand, if you lowered the price to $60, you'd attract bargain shoppers—but would need to sell 100 necklaces to break even

New input costs! The break-even formula can help you compare different cost structures as well as prices. For instance, suppose you used less expensive materials in your necklaces and pared the unit cost down to $45. The formula tells you that you'd have to sell just 66 necklaces at $60 to break even.