Breakeven analysis

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Breakeven analysis
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Key terms (1)

• Before we start studying breakeven it is
  essential that you understand some key terms
• Breakeven is the point at which total revenue
  equals total costs. Breakeven analysis helps
  businesses make decisions about prices, costs and
  the level of sales.
• Turnover or sales revenue is the money a business
  receives from selling its goods.
• Total revenue Price per product x Quantity sold
• If I charged 20 for each product and sold ten
  then my total revenue would be 200.

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Key terms (2)

• Total costs Fixed costs Variable costs
• Fixed costs are costs that do not change as
  output changes, e.g. rent.
• Variable costs depend on the amount a business
  produces, e.g. the more milkshakes McDonalds
  sells, the more ingredients it will need.

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Key terms (3)

• Contribution per unit is
• Selling price per unit Variable price per unit
• Margin of safety is the point at which a firms
  actual sales are greater than its breakeven
  point.

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Scenario AP Sports (1)

• Andy set up AP Sports in 2012 and his costs and
  revenues were as follows
• Price per unit 10
• Variable cost per unit 5
• Fixed costs 10
• We can lay this out in a table format to help us
  understand the theory.

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Scenario AP Sports (2)
Number sold Fixed costs () Variable costs () Total costs () Total revenue ()
0 10 0 10 0
1 10 5 15 10
2 10 10 20 20
3 10 15 25 30
4 10 20 30 40
5 10 25 35 50
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Scenario AP Sports (3)

• The fixed costs remain constant at 10.
• Total costs are when fixed costs are added to
  variable costs.
• The breakeven point is at two units, as the total
  revenue equals total costs.

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The formula method

• A much quicker way to calculate the breakeven is
• Total fixed costs Contribution per unit

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Why is breakeven useful?

• It helps assess the impact of price changes.
• It helps assess changes in costs.
• It is a useful planning tool.
• It is an essential part of any business plan.

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Problems with breakeven

• Breakeven is only a forecast. It can change if
• the price of raw materials changes
• the number of competitors changes
• the current market is volatile and breakeven
  becomes less predictable

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Student task (1)

• Fixed costs 2,000 per month
• Variable cost per unit 50
• Price per unit 100

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Student task (2)

• Based on the information on the last slide
• Draw a table for the monthly data (going up in
  units of 10) and try and identify the breakeven
  figure.
• Calculate the breakeven using the formula method.
• Draw a breakeven diagram on graph paper,
  labelling it as follows total revenue, total
  costs, fixed costs, breakeven point