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Unit 3 Financial Forecasting in Business P4 P5 M2 D1 Break Even
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The Break Even Point Why calculate the break even point? P4
The number of cakes Max needs to sell in order to pay all the costs of running his business. Why calculate the break even point? So Max knows how many cakes he has to sell each year in order for the business to survive Once he has reached his break even point, he then knows all sales after that will be profit.
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Constructing a Break-Even Chart
Sales revenue Total Costs Break-even Point Fixed Costs Margin of Safety Output
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Break-even Table: based on a price of £2000
Number of Units 2 4 6 8 Fixed Costs Variable Costs Total Costs Sales Revenue 4000 4000 4000 4000 4000 2000 4000 6000 8000 4000 6000 8000 10000 12000 4000 8000 12000 16000 Fixed costs are £4000, the variable cost per unit is £1000
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Break-Even Chart: Price £2000
Revenue Sales revenue 16000 14000 Total Costs 12000 Break even Point = 4 units 10000 Break-even Point Profit if we sell 6 units = £2000 8000 6000 Loss if we only sell 2 units = £2000 Fixed Costs 4000 2000 2 4 6 8 Number of cakes
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Break-even Table: based on a price of £3000
Number of Units 1 2 3 4 Fixed Costs Variable Costs Total Costs Sales Revenue 4000 4000 4000 4000 4000 1000 2000 3000 4000 4000 5000 6000 7000 8000 3000 6000 9000 12000 Fixed costs are £4000, the variable cost per unit is £1000
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Break-Even Chart: Price £3000
Revenue Sales revenue 12000 Total Costs 9000 Break even Point = 2 units Break-even Point 6000 Fixed Costs 3000 Margin of Safety (1 cake) 1 2 3 4 Number of cakes
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What happened to the break-even point when Max increased his price from £2,000 to £3,000? Break-even point fell from 4 to 2. He did not have to sell as many cakes in order to break even.
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P5 Now draw a break even graph using the figures from the Max’s Cartoon Cakes.
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Break Even Graph: Max P5 Fixed costs per year: £7920
Price per cake: £7.50 Variable cost per cake: £3.79 Plot: Fixed costs Total costs Sales Revenue Label BEP: where sales revenue crosses the total costs line
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Break Even Graph: Max FC VC TC SR 500 1000 1500 2000 2500 3000 7920
1895 5685 3790 7580 9475 11370 9815 11710 13605 15500 17395 19290 3750 7500 11250 15000 18750 22500
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Break-Even Chart: Price £7.50
Revenue Sales revenue 25000 Total Costs 20000 Break-even Point Break even Point = ?? units 15000 10000 Fixed Costs 5000 Margin of Safety (??? cakes) 500 1000 1500 2000 2500 3000 Number of cakes
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Margin of Safety P5 The difference between the number of cakes Max would like to produce and sell, and the break even point. Max thinks he will sell 2160 cakes every year. Margin of Safety for Max: 2160 – Break Even Point = ?
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Break Even Report a) Graph P4 Follow the format on your worksheet.
Before Question 4, put a heading: a) Graph
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Calculating the break-even point without a graph
Calculating how many products we need to sell in order to break even and cover our costs. Formula: Fixed Costs Contribution (Price – Variable cost)
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Contribution (Price – Variable cost)
Use the break-even formula to work out the break-even point for questions 1-5 below Fixed Costs Contribution (Price – Variable cost) Fixed cost = £20,000, price = £4,000, variable cost = £2,000 2. Fixed cost = £10,000, price = £4,000, variable cost = £2,000 3. Fixed cost = £26,000, price = £5,000, variable cost = £3,000 4. Fixed cost = £50,000, price = £20,000, variable cost = £10,000 5. Fixed cost = £1,000, price = £800, variable cost = £300 20,000 / 2,000 = 10 10,000 / 2,000 = 5 26,000 / 2,000 = 13 50,000 / 10,000 = 5 1,000 / 500 = 2
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P4 Using “P4 Break Even Calculation Worksheet.doc”, calculate the break even points. Complete the calculation at the bottom of the page for Max’s Cartoon Cakes.
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Using the Break Even Formula
P4 Fixed Costs Price – Variable Cost Fixed cost = £600, price = £400, variable cost = £100 2. Fixed cost = £10, price = £3, variable cost = £1 3. Fixed cost = £260, price = £50, variable cost = £30 4. Fixed cost = £50,000, price = £4,000, variable cost = £2,000 5. Fixed cost = £1,000, price = £400, variable cost = £200 600 / 300 = 2 10 / 2 = 5 260 / 20 = 13 50,000 / 2,000 = 25 1,000 / 200 = 5
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Break Even Report P4 Using a Formula
What is the formula used to calculate the break even point? Show the calculations for Max What is Max’s break even point using the formula Compare this to your graph – which calculation do you think is more accurate and why?
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Revision of Break Even Costs that do not change with output are called? Flour, eggs and cream are examples of which type of cost? Which two lines cross on a break even graph to show the break even point? How do you calculate total costs? Sales revenue = Number of cakes sold x ? The difference between the number of cakes produced and the break even point is called? 1. Fixed 2. Variable 3. Sales revenue and total costs 4. Fixed costs + Variable costs 5. Price 6. Margin of Safety
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M2 Demonstrate the impact of changing cost and revenue data on the break even point of a selected business.
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M2 Complete the worksheet: “M2 Changing Cost Revenue on BEP Worksheet.doc”. Using the worksheet, write a report explaining the effect on Max if costs and revenue change in his business. Show all the calculations and figures. How can Max improve his break even point?
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Formula to calculate the break even point
Fixed Costs Price – Variable Cost
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1. Calculation using the original figures
7920 7.50 – 3.79
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1. Break Even Point 2135 cakes
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2. Increase in Fixed Costs
Insert an increase in Fixed Costs: £8000
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2. Increase in Fixed Costs
Re-calculate the new Break Even Point. Write down one reason for the possible change in the fixed costs. Explain the impact on the break even point when the fixed costs increased.
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3. Increase in Variable Costs
Insert an increase in variable costs: £5.00
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3. Increase in Variable Costs
Re-calculate the new Break Even Point. Write down one reason for the possible change in the variable costs. Explain the impact on the break even point when the variable costs increased.
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Insert an increase in variable costs:
4. Increase in Price Insert an increase in variable costs: £8.00
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4. Increase in Price Re-calculate the new Break Even Point.
Write down one reason for the possible change in the price. Explain the impact on the break even point when the price increased.
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Effect on the BEP if costs or revenue change
M2 If fixed costs or variable costs increase, the BEP will increase – the firm will have to sell more products to cover their costs. If the selling price is increased, the BEP will decrease – the total revenue will increase so the firm can sell less products to cover their costs.
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How Max can improve the BEP
Increase the price of the product. The firm will receive more revenue and will have to sell less products in order to break even. 2. Decrease the fixed or variable costs. The total costs will then be lower so the firm will have to sell less products in order to break even.
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The Impact of Changing Costs and Revenue on the Break Even Point for Max
The original break even point for Max was ………… cakes. Increase in Fixed Costs If Max increased his fixed costs to £8,000, the calculation for the BEP would be: ……………………………………… The new break even point would be: …………… A possible reason for a change in the fixed costs is The impact on the BEP is that it has changed from to To improve this BEP, Max will have to …………………………………………………………………
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Increase in Fixed Costs
Revenue Sales revenue Total Costs 25000 Total Costs 20000 15000 10000 Fixed Costs Fixed Costs 5000 500 1000 1500 2000 2500 3000 Number of cakes
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Increase in Variable Costs
Revenue Sales revenue Total Costs 25000 Total Costs 20000 15000 10000 Fixed Costs 5000 500 1000 1500 2000 2500 3000 Number of cakes
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Increase in Price £ Revenue Sales revenue Sales revenue 25000
Total Costs 20000 15000 10000 Fixed Costs 5000 500 1000 1500 2000 2500 3000 Number of cakes
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How Max can improve the BEP
Increase the price of the product. The firm will receive more revenue and will have to sell less products in order to break even. 2. Decrease the fixed or variable costs. The total costs will then be lower so the firm will have to sell less products in order to break even.
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The Importance of Break Even
D1 The Importance of Break Even Report must include: Detailed explanation of the benefits of break-even calculations – with examples Detailed explanation of the limitations of break-even calculations – with examples Overall, do you think Max should calculate the break even point? Give detailed reasons for your decision
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Benefits of Break Even D1
Know how many cakes need to be sold – give example Know whether the business will make a profit or loss – give an examples Can take action if he knows he is not on target to reach the break even point – give an examples Can decide on his “margin of safety” – give an example
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Limitations of Break Even
D1 Limitations of Break Even When his costs change so the BEP will change – give an example If he changes his price, the BEP will change – give an example The system presumes that the cakes will be sold. This may not happen – give an example
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Importance of Break Even: Conclusion
D1 Importance of Break Even: Conclusion Overall, do you think Max should calculate the break even point? Using the work you have already written, give your opinion and fully justify your answer. Consider: Do the benefits outweigh the limitations? Is it essential for Max to know how many cakes he needs to sell to cover his costs? What might be the consequences if he did not know his BEP? The graph is tricky to produce but the formula is easy to use – Max could set this up on a spreadsheet
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Instructions for the spreadsheet
Explain in your work that Max could use a spreadsheet to calculate his BEP Insert a screenshot of the spreadsheet showing the formula and label Insert a screenshot of the spreadsheet and label Change either the price, fixed cost or variable cost on the spreadsheet Insert a screenshot showing the change you made. Label the screenshot and explain what happened to the BEP. Summarise why using a spreadsheet is a good idea for Max
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Work for Today … Complete D1 work including the instructions for the spreadsheet Load “Break Even Worksheet Table for Max.doc” from Unit 3 Copy figures onto the table and replace with hand written copy in work. Design a title page for work: “Break Even”
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