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Break Even Analysis


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Break Even Analysis

  1. 1. Break-Even Analysis Mr Arthur
  2. 2. Introduction <ul><li>It is very important for a company to work out whether or not they are making a profit. </li></ul><ul><li>We can work out this by writing up a Trading, Profit and Loss Account. </li></ul><ul><li>It is often useful to be able to predict Profit or Loss in the future. </li></ul><ul><li>We can ascertain this using Break-Even Analysis </li></ul><ul><li>The Break-Even point is where the company goes from making a Loss to making a Profit </li></ul>
  3. 3. Fixed Costs <ul><li>To work out the Break-Even Point we have to firstly calculate the Fixed Costs involved. </li></ul><ul><li>Fixed costs are costs you have to pay even if no sales are made (don’t confuse them with Fixed Assets!!!!!!) </li></ul><ul><ul><li>Premises </li></ul></ul><ul><ul><li>Wages of Employees </li></ul></ul><ul><ul><li>Insurance </li></ul></ul><ul><ul><li>Bank Loan </li></ul></ul><ul><ul><li>Motor Vehicles </li></ul></ul>
  4. 4. Variable Costs <ul><li>You also have to calculate any Variable Cost involved in running your business. </li></ul><ul><li>Variable costs are costs that change depending on how much you are producing </li></ul><ul><ul><li>Cost of Raw Materials </li></ul></ul><ul><ul><li>Transport cost per Item </li></ul></ul><ul><ul><li>Electricity used to produce 1 item </li></ul></ul>
  5. 5. Total Cost <ul><li>If you add the Fixed Costs to the Variable Costs, you will get the Total Cost of running your business, per item produced </li></ul>
  6. 6. Total Revenue <ul><li>The final thing you have to do to calculate the Break-Even Point is to calculate the Total Revenue </li></ul><ul><li>Number of Items Produced </li></ul><ul><li>X Revenue per Item </li></ul><ul><li>200 units X £15 </li></ul><ul><li>= £300 </li></ul>
  7. 7. The Break-Even Point <ul><li>The point at which the company goes from making a loss to making a profit is the Break-Even Point </li></ul><ul><li>You work this out by looking at when the Total Revenue covers the Total Costs </li></ul>
  8. 8. The Break-Even Point Sales and Costs (£) Revenue Total Cost Number of Items Produced