1.12 break-even (part 2) - moodle

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1.12 break-even (part 2) - moodle

  1. 1. Do Now!Revise the formulasthat relate tocontribution andbreak-even analysis
  2. 2. Do NowWhat is the formula used to calculate contribution?Contribution = selling price - variable cost
  3. 3. Do Now What is the formula used to calculate total contribution?Total contribution = unit contribution x no. of units sold
  4. 4. Do Now What is the formula used to calculate profit?Profit = Total contribution – fixed costs
  5. 5. Do NowWhat is the formula used to calculate break-even level of output? Break-even output = Fixed costs Contribution per unit
  6. 6. DO NOW Calculate this example:A firm selling birthday cakes has total fixed costs of £15,000.The variable cost of each cake is £5 and the selling price is £15.What is the break-even level of output?Clue: You should calculate contribution per unit first
  7. 7. DO NOW Answers:Contribution per unit: £15 - £5 = £10Break-even level of output: £15,000 = 1500 cakes £10
  8. 8. Break-Even Analysis (Part 2)
  9. 9. Learning ObjectivesBy the end of this lesson you should be able to:1. Construct break-even charts.2. Show the effects of changing costs and prices on contribution per unit, break-even charts and the break-even level of output3. Use these concepts to assist an entrepreneur in deciding whether to start a new business or not4. Evaluate the strengths and weaknesses of break-even analysis
  10. 10. Strengths and weaknesses of break-even analysis Half 1 Half 2 Produce a list of 5 Produce a list of 5 strengths of break-even weaknesses of break- analysis even analysis Reduce this to your top 2 Reduce this to your top 2LO4 Evaluate the strengths and weaknesses of break-even analysis
  11. 11. Strengths and weaknesses of break-even analysis Strengths Weaknesses 1. Simple and easy to 1. Assumes all output is sold understand by most 2. Firms may sell more than entrepreneurs one product 2. Vital for decision making 3. Assumes steady and 3. Support loan applications consistent costs 4. Adapted to changing 4. Not definite – planning aid circumstancesLO4 Evaluate the strengths and weaknesses of break-even analysis
  12. 12. Learning ObjectivesYou should now be able to:1. Construct break-even charts.2. Show the effects of changing costs and prices on contribution per unit, break-even charts and the break-even level of output3. Use these concepts to assist an entrepreneur in deciding whether to start a new business or not4. Evaluate the strengths and weaknesses of break-even analysis

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