1. Learning Objectives To develop your understanding of Break-even analysis To develop your understanding of Break-even analysis To be able to identify the break- even point To be able to identify the break- even point

2. What is Break even? How many units you need to sell to Cover your Costs Total Sales = Total Costs If a company sells more units than what are need to cover its costs then they are making a… PROFIT

3. Know your Costs - Recap Fixed Costs Fixed Costs –These are costs that stay the same – regardless of the level of output! Rent Light & Heating Advertising Water Gas Salaries/Wages (office staff) Variable Costs – –These are costs that change – with changes in output! Stock Materials for making products Wages (what type of pay?)

4. Total Costs This is the total amount of money a firm spends on making goods or services This is the total amount of money a firm spends on making goods or services It is calculated by the following formulas: It is calculated by the following formulas: Total cost = fixed cost + variable cost

5. An example of total costs A firm makes 10,000 cans of drink A firm makes 10,000 cans of drink It has the following fixed costs: It has the following fixed costs: –$1000 rent –$5000 electricity They also know that it costs 5c to make every can of drink that it produces. They also know that it costs 5c to make every can of drink that it produces. Total cost will be ?????..... Total cost will be ?????..... –Fixed cost = 1000+5000= $6000 –Variable cost = 10000 x 5c = $500 –Total costs = 6000 + 500 = $6500

6. Revenue This is your TOTAL Sales... In a week, if we sell: 100 cakes @ $1.50 50 drinks @ $0.25 20 chocolate bars @ $0.50 What is my Revenue for that week ? $172.50

7. Step one – draw and label the axes of the graph Costs/ Revenue $ Output 0 2 4 6 8 10 (thousands) 1000 4000 3000 2000 7000 60005000

8. Step 2 – Draw fixed cost line Output Fixed Costs 0 2 4 6 8 10 1000 4000 3000 2000 70006000 5000 Costs/ Revenue $ (thousands)

9. Step 3 – Draw total costs Output Fixed Costs 0 2 4 6 8 10 1000 4000 3000 2000 70006000 5000 TOTAL Costs Costs/ Revenue $ (thousands)

10. Step 4 – add sales revenue line Output Fixed Costs 0 2 4 6 8 10 1000 4000 3000 2000 700060005000 TOTAL Costs Total Revenue Costs/ Revenue $ (thousands)

11. Step 5 - Analysing the chart Output Fixed Costs 0 2 4 6 8 10 1000 4000 3000 2000 70006000 5000 TOTAL Costs Total Revenue Break Even Point – Where Total Costs and Total Revenue are equal Making a Loss  Making a Profit Costs/ Revenue $ (thousands)

12. Calculating the Break even Break even output = Fixed Costs Selling Price – Variable Costs FC SP - VC

13. Average Costs Calculation: Total Costs / Total Output It shows the average cost to produce one unit So, what is the ideal average cost of an item? LESS than it is sold for The lower the average cost, the higher the profit! Look at activity 31.1 on pg 174... Calculat e the missing figures in the table What “pattern” can you see with output and total costs? Look at activity 31.1 on pg 174... Calculat e the missing figures in the table What “pattern” can you see with output and total costs?

14. Why are our costs $4500 if we aren’t producing any mirrors?

15. What is happening to your fixed costs? What is happening to your variable costs? Why are the VC increasing if more mirrors are made?

16. Marginal Costs How much total costs increase with the production of one additional unit So, if the marginal cost to make 1 extra unit is more than the revenue you could get from selling it, what does that mean? (eg – marginal cost $4, additional revenue $3) It isn’t costs effective to make it! Costs aren’t being covered!

17. Other costs... DIRECT COSTS DIRECTLY involved in the manufacturing of a product So, if you have staff making some computers on a production line, their wages are DIRECT labour The materials to make the computers are direct costs INDIRECT COSTS NOT involved in the actual manufacturing of a product Eg’s: staff salaries (managers, sales, marketing, supervisors) Rent, heat, light, water, gas, postage, electricity etc... What have you seen these referred to as before ???? Overheads/Expenses Do activity 31.2 on pg 175... THEN – Activity 31.4 on pg 177 QUESTION 2 only THEN – Activity 31.4 on pg 177 QUESTION 2 only