Break even and forecasting profits. Break even formula and how to use break even analysis as part of your pricing strategies

1. Break Even Analysis and Forecasting Profits
A flipped lesson by Mr. Meyer
for Business Studies 3 students

2. Sales Forecasting
•
•
Use of a cost volume graph.
Shows relationship between Total Revenue and Total Costs on a
graph.
•
•
•
Profit can be shown graphically.
Total Costs = Fixed costs and Total Variable costs.
Fixed costs are costs that do not vary regardless of how many units
are sold.
•
Variable costs are costs per unit sold * number of units sold.

3. Break Even Analysis
•
Determines the level of sales needed to cover all costs (fixed costs
and variable costs).
•
•
Sales above the break even point means a profit.
Sales below the break even point means a loss

4. Break Even Formula
•
•
•
Break Even (quantity)
=
Total fixed costs
Sales Price – Variable costs per unit

5. Break Even Example on Page 416
Fixed costs = $600000
Sale price of tennis racquet = $200
Variable cost of each tennis racquet = $80
BE=
Total fixed costs
Sales Price – Variable costs per unit
•
BE = 600000
(200-80)
=
600000
120
Break Even = 5000 units

6. What does it mean for ‘Better Racquets’?
•
•
5000 racquets need to be sold in one year to break even
That means under 100 racquets need to be sold every week to break
even.
•
If the business sells less than 100 racquets then ‘Better racquets has
made a loss.
•
If the business sells more than 100 racquets then ‘Better racquets
has made a profit.

7. A graphical example
By using a cost volume graph it illustrates
when a profit or loss is expected.
Use the graph on Page 416 of your text.

9. Break Even Graph Dissected
Fixed Costs
Variable Costs

10. Total Costs
Total costs = Fixed costs + variable costs
The Total Costs curve begins at 0 sales and Fixed costs.

11. Break Even Analysis
A worked example
•
•
•
•
Using figure 12.17 from page 416 in your text.
Sales Price = $1000
Variable cost per unit = $800
Fixed costs = $30000

13. Break Even Analysis
A worked example
•
•
•
•
Using figure 12.17 from page 416 in your text.
Sales Price = $1000
Variable cost per unit = $800
Fixed costs = $30000
BE=
Total fixed costs
Sales Price – Variable costs per unit
•
BE = 30000
(1000-800)
=
30000
200
Break Even = 150 units

14. The Excel Spread Sheet Table
Units
Fixed Costs
Variable costs
Total costs
Revenue
Profit
0
30000
0
30000
0
-30000
25
30000
20000
50000
25000
-25000
50
30000
40000
70000
50000
-20000
75
30000
60000
90000
75000
-15000
100
30000
80000
110000
100000
-10000
125
30000
100000
130000
125000
-5000
150
30000
120000
150000
150000
0
175
30000
140000
170000
175000
5000
200
30000
160000
190000
200000
10000
225
30000
180000
210000
225000
15000

15. 250
225
Break Even Point at 150 units
200
Total costs ($,000)
175
Profit making area
150
125
Fixed Costs
Total costs
Fixed costs start at 0 sales
100
Revenue
75
Loss making area
50
25
0
0
25
50
75
100
125
Sales
150
175
200

16. Check your understanding
Page 423
Revision Questions 1,2,3 & 5
Break even exercise on page 423 , Question 7