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1.12 break-even (part 1) - moodle

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• Mini whiteboards
• Students to complete handout
• Students to calculate and write figure on mini whiteboardsAttempt student handoutLooking at changes to the break-even level of output – Video (1.50 – 5.05 mins)
• Students to attempt the case study in textbook P81
• Mini whiteboards
• 1.12 break-even (part 1) - moodle

1. 1. Do NowWhat do you remember from‘Cash Flow Forecasting’ …. Test what you’ve learned!
2. 2. Break-Even Analysis
3. 3. Essentials for Break-Even 1st to completeDo you remember your 5 VIVOSfinance key terms? 3 minutes
4. 4. Learning ObjectivesBy the end of this lesson you should be able to:1. Understand what is meant by break-even.2. Calculate contribution per unit of output and total contribution.3. Use contribution per unit to calculate the break- even level of output.
5. 5. What is Break-Even Using the following key words – construct a definition for break-even…. A firm will break-even when total revenue Profit Total Costs meets total costs. Once achieved the firm will have the opportunity to make profit.LO1 Understand what is meant by break-even.
6. 6. Who wants to know about break- even and why? Think Pair Share Write down your Walk around the Share your ideas reasons. room until the with the rest of music stops and the group. share your ideas. Owners/ shareholders – can anticipate when the firm will begin making profit. Banks/ Lenders - will want to know if that the firms figures are realistic or secure. Investors – want to know the value or worth of the firm.LO1 Understand what is meant by break-even.
7. 7. Contribution Contribution – is the difference between sales revenue and variable costs of production. What remains goes towards paying for fixed costs. Contribution towards paying for fixed costs Sales Variable Less = Revenue Costs Contribution Less Fixed Costs = ProfitLO2 Calculate contribution per unit of output and total contribution.
8. 8. Contribution per unit Contribution = Selling Price of one unit – Variable Cost of producing one unit. Total contribution = Unit Contribution x No. of Units Sold Profit = Total Contribution – Fixed costs Why do you think that businesses want to break down costs in this way?LO2 Calculate contribution per unit of output and total contribution.
9. 9. Contribution per unit Important points to remember about contribution per unit…. It can be increased by raising the selling price. It can be increased by reducing variable costs. It is not the same as profit per unit as fixed costs are not subtracted. An increase in contribution per unit raises the potential profit that a business can make.LO2 Calculate contribution per unit of output and total contribution.
10. 10. Calculating the break-even level of output Breaking-even level of output - this is the level of output or the number of customers that earn enough revenue to cover costs of production. Break-even output = Fixed costs Contribution per unit What are the benefits of planning to reach a LOW break- even point?LO3 Use contribution per unit to calculate the break-even level of output.
11. 11. Calculating the break-even level of output. If a printing business pays fixed costs of £500 per week and each customer earns the business a contribution of £250, how many customers are needed to pay for fixed costs – and therefore break- even? Break-even output = Fixed costs Contribution per unit Break-even output = £500 =2 £250LO3 Use contribution per unit to calculate the break-even level of output.
12. 12. Calculating the break-even level of output. Important points to remember calculating the break-even level of output…. If nothing else changes, a reduction in contribution per customer/ unit will raise the break-even level of output. If output does not increase then profits will fall. Calculating break-even output is an easy way of checking the viability of a new business proposal. If output seems high then an entrepreneur can consider reducing fixed costs or raising contribution per unit of output.LO3 Use contribution per unit to calculate the break-even level of output.
13. 13. Pierre’s Personal T-shirtsPierre believes that his break-even output may be toohigh. With reference to the case study, what would bethe best approaches for him to use in order to reducehis break-even output? Justify your view. (15 Marks)
14. 14. Finally….What is the formula used to calculate contribution?Contribution = selling price - variable cost
15. 15. Finally…. What is the formula used to calculate total contribution?Total contribution = unit contribution x no. of units sold
16. 16. Finally…. What is the formula used to calculate profit?Profit = Total contribution – fixed costs
17. 17. Finally….What is the formula used to calculate break-even level of output? Break-even output = Fixed costs Contribution per unit
18. 18. Learning ObjectivesYou should now be able to:1. Understand what is meant by break-even.2. Calculate contribution per unit of output and total contribution.3. Use contribution per unit to calculate the break- even level of output.