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

2. 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?

3. 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

4. Profit?
So what is PROFIT?

5. 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

6. Break Even Analysis

7. 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

8. 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

9. 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

10. 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?