Break-Even Year 12 Business

What is Break-Even You tell me… It is the level of output or production at which a businesses sales generate jut enough revenue to cover all its costs of production.

Using Break-Even to Make Decisions To help to decide whether the business idea will be profitable and whether it is viable To help decide the level of output and sales necessary to generate a profit Break-even analysis can be used to help support an application for a loan

But wait…there’s more… To assess the impact of changes in the level of production on the profitability To assess the effects of different prices and levels of cost on the potential profitability of the business

Question Assume you are an entrepreneur and your break-even forecast shows that you aren't going to make diddly squat in the first year of trading. Would you abandon the idea??? How about short term or long term? What would the impact be of this was to continue?

Contribution It is an important part of the break even analysis Contribution is calculated by – Contribution = revenue – variable costs Once you have your contribution, businesses use it to pay the fixed costs Once that has been paid anything left over is profit

Contribution Revenue From Sales Less Variable Costs Gives Contribution Used to pay Fixed Costs Profits Than left with

Contribution Definition: Is the difference between sales revenue and variable costs; it is used to pay fixed costs and to provide profits

Calculating the Break Even Point An entrepreneur wishing to calculate break-even point will require the following information; The selling price of the product The variable cost of producing a single unit The fixed costs associated with the product Break-even = fixed costs/selling price per unit – variable cost per unit Or Break-even = fixed costs/contribution per unit

Example How many meals would I have to sell in order to break even Type of Cost or Revenue Amount Average Selling Price of a Meal £60 Variable Costs per meal (ingredients, Fuel, Wages) £35 Monthly Fixed Costs (rent and rates) £10,000

A Break Even Chart