1. Break Even Analysis

2. Learning Objectives In today’s lesson you will earn about: In today’s lesson you will earn about: Re-cap of cost curves Re-cap of cost curves What is meant by revenue and how to calculate it What is meant by revenue and how to calculate it What a revenue curve looks like and how to draw it What a revenue curve looks like and how to draw it Construction of a break even chart Construction of a break even chart

3. Costs Costs output Fixed costs Total costs Variable costs

4. Total revenue The value of the goods or services a business sells The value of the goods or services a business sells Total Revenue = Price (of product) x quantity (sold) Total Revenue = Price (of product) x quantity (sold) Example - if our previous example sells 10 of its product at £4 its revenue from this sale is; Example - if our previous example sells 10 of its product at £4 its revenue from this sale is; Total revenue = 10x £4 = £40 Total revenue = 10x £4 = £40

5. Total revenue and output (Firm X) Output (iPads) Total Revenue(£) 00 1040 1560 2080 25 30

6. Exercise In our previous example lets assume that the firm we were looking at sells it’s product at £4 In our previous example lets assume that the firm we were looking at sells it’s product at £4 We’ll assume it sells all its output up to 30 units We’ll assume it sells all its output up to 30 units Ie when it produces 10 units it sells all 10 at £4 so its revenue is £40 Ie when it produces 10 units it sells all 10 at £4 so its revenue is £40 Now draw a new table showing costs, output and revenue Now draw a new table showing costs, output and revenue Plot the firm’s revenue curve on a new graph Plot the firm’s revenue curve on a new graph

7. Revenue Curve Costs/price output Total revenue

8. Break Even Chart Now plot all the firms cost curves and revenue curve on one big graph Now plot all the firms cost curves and revenue curve on one big graph Use on side of A4 to do this Use on side of A4 to do this Use different colours for your lines if possible Use different colours for your lines if possible You should have something that looks like this: You should have something that looks like this:

9. Break Even Chart Costs/prices output Fixed costs Total costs Total revenue Break even output Break even point Profit( margin of safety) loss

10. Explanation of Break Even Chart Shows the profit or loss made by the firm at each level of production Shows the profit or loss made by the firm at each level of production The amount of profit is shown as the distance between the total revenue and total cost curves The amount of profit is shown as the distance between the total revenue and total cost curves Where total revenue = total cost is the break even point I.e. neither profit or loss is made Where total revenue = total cost is the break even point I.e. neither profit or loss is made Above the break even point profit is made Above the break even point profit is made Below the break even point losses are made Below the break even point losses are made

11. Exercise Caroline’s café 2 case study Caroline’s café 2 case study Tasks 1,2,3,4 Tasks 1,2,3,4

12. Decision making with break even Shows the effects of changes in costs Shows the effects of changes in costs Shows the effect of changes in price/revenue Shows the effect of changes in price/revenue

13. limitations Assumes all of the product is sold Assumes all of the product is sold Unexpected changes in costs can render the chart obsolete Unexpected changes in costs can render the chart obsolete

14. Break Even Formula Break even = Fixed Costs selling price – variable cost/unit selling price – variable cost/unit

15. Profit Profit=Total revenue-total costs Profit=Total revenue-total costs Economists see profit as the reward to entrepreneurs for risk taken in organising the factors of production Economists see profit as the reward to entrepreneurs for risk taken in organising the factors of production Land-rent, labour-wages, capital-interest, enterprise-profit Land-rent, labour-wages, capital-interest, enterprise-profit

16. Exercise Page 360 It Makes You Think Questions a, b,c,d,e Page 360 It Makes You Think Questions a, b,c,d,e Page 365 Heinemann textbook integrated activity Questions 1- 4 Page 365 Heinemann textbook integrated activity Questions 1- 4

17. Question 1 Fixed Costs Van MOT Van MOT Javeds Salary Javeds Salary New photocopier New photocopier Andrea’s salary Andrea’s salary Fax machine Fax machine Drivers salary Drivers salary Heating Heating Lighting Lighting New office carpet New office carpet Tea bags Tea bags Variable Costs Petrol Petrol Blank paper Blank paper Electricity for the press Electricity for the press Ken’s wages Ken’s wages Telephone bill Telephone bill Printing ink Printing ink Distribution wages Distribution wages Stationary Stationary

18. Question 2 Break even = fixed costs/selling price - variable cost/unit Break even = fixed costs/selling price - variable cost/unit Break even = 100/1.50-1.20 = 333.3 Break even = 100/1.50-1.20 = 333.3 i.e. 333.3 posters to break even i.e. 333.3 posters to break even Ben has accepted the order for 500 posters because he knows he will make a profit on every poster after 334 have been produced Ben has accepted the order for 500 posters because he knows he will make a profit on every poster after 334 have been produced

19. Question 3 Break even = fixed costs/selling price - variable cost/unit Break even = fixed costs/selling price - variable cost/unit New break even = 130/1.50-1.20 = 433.3 New break even = 130/1.50-1.20 = 433.3 Yes Ben should still accept the order of 500 posters as he will make a profit on every poster after 434 have been produced Yes Ben should still accept the order of 500 posters as he will make a profit on every poster after 434 have been produced

20. Question 4 Break even = fixed costs/selling price - variable cost/unit Break even = fixed costs/selling price - variable cost/unit (a) BE = 100/1.40-1.20 = 500 posters (a) BE = 100/1.40-1.20 = 500 posters (b) BE = 100/1.30-1.20 = 1000 posters (b) BE = 100/1.30-1.20 = 1000 posters Ben should suggest selling price of £1.40 in order to make a profit ( at £1.30 he will only break even) Ben should suggest selling price of £1.40 in order to make a profit ( at £1.30 he will only break even)