Starter

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Starter
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Part 8

• Drawing Break-even charts

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Lesson Objective

• To be able to draw a break-even chart.
• To be able to interpret a Break-even chart.

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Break-even Charts

• We know how to calculate the break-even point,
  but you can also draw it on a chart!
• This involves drawing 3 lines
• The fixed coats line
• The total costs line
• The total revenue (sales) line
• Read through the sheet you have been given.
• Highlight 3 questions you have!

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What does the Revenue Graph look like?
Total Costs/ Revenue
Total Revenue
Quantity
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What does the Breakeven chart look like?
Total Revenue
Breakeven Point
Total Costs/ Revenue
Total Costs
Quantity
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What does the Breakeven chart look like?
Total Revenue
Breakeven Point
Profit
Total Costs/ Revenue
Total Costs
Loss
50 Units
100 Units
150 Units
Quantity
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Margin of Safety

• This is the difference between the break-even
  point and the current level of output.
• If we produce 100 cakes the margin of safety
  would beProduction Breakeven Margin of
  safety
• 100 25 75
• margin of safety is how much output or sales
  level can fall before a business reaches its
  breakeven point.

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The Margin of Safety?
Total Revenue
Breakeven Point
Profit
Total Costs/ Revenue
Total Costs
Loss
Margin of Safety 100 150 50
50 Units
100 Units
150 Units
Quantity
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Plotting a Break-even graph

• STEPS TO FIND OUT THE BREAK-EVEN USING A GRAPH
• Calculate the companies costs using a simple
  table
• Draw the graph
• Plot fixed costs Add variable costs to fixed
  costs to get total costs. Plot it on the graph.
• Next plot revenue
• The break-even point is where revenue line
  crosses the total costs line.
• Break-even graphs show costs and revenue plotted
  against output
• Output goes on the horizontal axis (starting
  from 0)
• Costs and revenue both go on the vertical axis

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Task - Evans Cricket Bats Ltd
Output (No of cricket bats) Fixed costs Variable costs Total costs Sales revenue
1,000 40,000
2,000 40,000
3,000 100,000
4,000 140,000

• Fixed costs 40,000
• Variable costs 20 per cricket bat
• Total costs Fixed variable costs
• Sales revenue Selling price x output
• Cricket bats sold for 35 each

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Stage 1 calculating costs revenue
Output (No of cricket bats) Fixed costs Variable costs Total costs Sales revenue
1,000 40,000 20,000 60,000 35,000
2,000 40,000 40,000 80,000 70,000
3,000 40,000 60,000 100,000 105,000
4,000 40,000 80,000 120,000 140,000

• Fixed costs 40,000
• Variable costs 20 per cricket bat
• Total costs Fixed variable costs
• Sales revenue Selling price x output
• Cricket bats sold for 35 each

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Stage 2 DRAW the graph
To be able to draw a break-even chart.

• Turn your paper so it is LANDSCAPE and copy this.

Costs ()
2000
4000
1000
3000
Output (No of cricket bats)
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Stage 3 Showing costs on a graph.
To be able to draw a break-even chart.

• Insert fixed costs.

Costs ()
1000
2000
3000
4000
Output (No of cricket bats)
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Stage 3 Showing costs on a graph.
To be able to draw a break-even chart.

• Calculate total costs.

Fixed costs
Variable costs
Costs ()
Total costs
1000
2000
3000
4000
Output (No of cricket bats)
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Stage 4 Showing revenue on a graph
To be able to draw a break-even chart.

• Now add revenue to your graph.

Fixed costs
Variable costs
Costs ()
Total costs
1000
2000
3000
4000
Output (No of cricket bats)
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Stage 4 Showing revenue on a graph
To be able to draw a break-even chart.

• Now add revenue to your graph....

Fixed costs
Variable costs
Costs and sales revenue ()
Total costs
Sales revenue
1000
2000
3000
4000
Output (No of cricket bats)
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Stage 5 revealing the break-even point
To be able to draw a break-even chart.

• Break-even is point is where revenue line
  crosses the total costs line.

Fixed costs
Variable costs
Costs and sales revenue ()
Total costs
Sales revenue
1000
2000
3000
4000
Output (No of cricket bats)
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Break-even limitations

• It assumes that the firm can sell any quantity of
  the product at the current price. In practice the
  firm may need to reduce prices to sell at high
  levels of output.
• It assumes fixed costs never change - but as
  output increases the firm may need to buy more
  machines, get bigger premises, take on extra
  sales and administration staff.
• It assumes that all products are sold. This
  doesnt always happen some products may only be
  sold at lower prices or need to be thrown away.

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And to finish
To be able to interpret a break-even chart.

• On the work sheet, complete the questions
• margin of safety is how much output or sales
  level can fall before a business reaches its
  breakeven point.