Break even china
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Break even china

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Break even china Break even china Presentation Transcript

  • Recap
  • Fixed or variable
  • Security
  • Insurance
  • Electric
  • Workers
  • Telephone
  • Raw Materials
  • Accountant
  • Financial management
  • Learning Objectives Introduction to break-even Define and calculate contribution Define and calculate contribution per unit Identify the relationship between contribution, profit and pricing Assess the relationship between break – even and contribution
  • What is Break - even? It is the point at which a company is not making a loss or a profit. The business income equals its expenditures. It is a significant marker as it allows management to know the level of output required to sustain and succeed. It can be used to help determine pricing strategy, budgets, quality and output quantity. It is where Costs = Revenue within a business. Always measured in production units never cost
  • Terms to be familiar with Variable costs = changes depending on output. Fixed costs (fixed overheads) = remains the same no mater how much is produced Total cost = Fixed cost + variable costs Profit Loss
  • Terms to be familiar continued Output Contribution Revenue (Sales revenue) = when firms get money from selling their products / services Margin of Safety Break – even point
  • Variable costs Variable costs correlate to output This could be the price of ink, or fabric within a T- shirt factory. Variable costs can be reduced by reducing waste, finding cheaper suppliers or streamlining the production process
  • Fixed costs Remain the same irrespective of output Could be  Rent  Rates  Salaries  Accountancy costs  Most marketing costs  Leasing equipment costs
  • Revenue Revenue is the amount of capital (money) brought in by the firm form sales of goods or services. Revenue is calculated before any expenses are deducted. If a firm sold 10 T-shirts at £15 within a specific timeframe (say a month) total revenue for that month would be £150 Revenue alone is NOTHING to do with profit!!
  • What is Break – even analysis? It is a technique widely used by production management and management accountants.  It is based on categorising production costs between those which are variable (costs that change when the production output changes)  and those that are fixed (costs not directly related to the volume of production).
  • Calculating the Break – even point There are two ways to calculate the break-even point. The two ways are as follows: The contribution method Producing a break–even chart
  • Contribution Essentially the difference between revenue (sales) and variable costs. For example if a shirt sells at £25 (revenue) and it costs £5 for the material and £3 for the ink for the prints on the shirt the variable costs would be £?. £8 The contribution per unit would be £17  £25 revenue - £8 = £17 - V.C. = contribution
  • Contribution Method This involves a two part calculation: Revenue (selling price) per unit – variable cost per unit = contribution (towards fixed costs). AND Fixed costs / contribution = break-even point.
  • Example If fixed costs = £2000, variable costs = £8 per unit, selling Price per unit =£10. Then break-even would be: Price per unit – variable cost per unit = contribution (towards fixed costs). £10 - £8 = £2 (contribution, towards fixed costs) Fixed costs / contribution = break-even point. £2000 / 2 = 1000 1000 products will need to be sold in order to break-even and cover all their costs.
  • Task Lisa has set up a business to print T-shirts. The fixed costs of premises and the T-shirt printers are £3000. The variable costs per T-shirt (the T-shirt, ink, wages) are £5. Each printed T-shirt sells for £25. NOW YOU TRY!
  • Task Answer Lisa has set up a business to print T-shirts. The fixed costs of premises and the T-shirt printers are £3000. The variable costs per T-shirt (the T-shirt, ink, wages) are £5. Each printed Tshirt sells for £25. Revenue per unit – Variable Cost Per Unit = Contribution £25 - £5 = £20 (Contribution per unit) Fixed Costs / Contribution per unit = Break-even Point. £3000 / 20 = 150 Lisa must sell 150 T-shirts to brake even
  • Task 2 Rebecca starts a business making and selling handbags and has the following costs: Fixed Costs Variable Costs Selling Price £50,000 per year £15 per handbag £55 each Calculate the break-even point?
  • Answer   Revenue – Variable Cost = Contribution £55- £15 = £40 (Contribution)   Fixed Costs / Contribution = Break-even Point. £50,000 / £40 = 1250 Rebecca has to sell 1250 handbags to brake even.
  • Break – even chart A break-even chart can demonstrate the effects of change in price of products / services Units produced Fixed cost Variable cost Total cost 1 15,000 20 15,020 50 15,000 1,000 16,000 100 15,000 2,000 17,000 150 15,000 3,000 18,000 200 15,000 4,000 19,000 250 15,000 5,000 20,000
  • Fixed Cost T.R. & Costs Production
  • Fixed Cost T.R. & Costs Production
  • Total Cost Fixed Cost T.R. & Costs Production
  • Total Revenue Total Cost T.R. & Costs Fixed Cost Production
  • Total Revenue Total Cost T.R. & Costs Fixed Cost Break - even Point Production
  • Total Revenue Total Cost T.R. & Costs Fixed Cost Break - even Point Margin of safety Production
  • Area of profit
  • Margin of safety The margin of safety represents the total current output and total revenue. It shows the current level of output at a point on the total revenue line. The difference between current output and the break – even point is the margin of safety. Businesses need to be aware of the margin of safety as it shows the extent demand for their products and services can drop before they start making a loss
  • Start of chart Start by compiling a simple grid to calculate total costs at certain quantities of production, plotting your chart is made a lot easier. Units produced Fixed cost Variable cost Total cost 1 15,000 20 15,020 50 15,000 1,000 16,000 100 15,000 2,000 17,000 150 15,000 3,000 18,000 200 15,000 4,000 19,000 250 15,000 5,000 20,000
  • Task for graph paper Mark is selling 16GB USB pen sticks on a market stall. The pen sticks cost him £4.80, he sells them at £9.00. His market stall rent is £100 on Saturday. Using the graph paper provided make a break-even chart to determine how many pen sticks Mark will have to sell to break-even. 2. Mark has also been offered the same stall on Sunday at a discounted rate for £60, Using the same chart 1. calculate how many items he will need to sell to break-even on Sunday
  • Questions???