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Costs and Breakeven Slides

The document discusses calculating a break-even point for a business. It explains that the break-even point is where total costs equal total sales revenue, meaning the business is not making a profit or loss. It outlines the different types of costs that go into calculating the break-even point, including variable costs that change with production and fixed costs that remain constant. The break-even analysis allows businesses to determine if a venture will be financially viable and how changes in production, prices, or costs may impact profits. A formula is provided to calculate the break-even point using fixed costs and the difference between selling price and variable cost per unit.

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85 views12 pages

Costs and Breakeven Slides

The document discusses calculating a break-even point for a business. It explains that the break-even point is where total costs equal total sales revenue, meaning the business is not making a profit or loss. It outlines the different types of costs that go into calculating the break-even point, including variable costs that change with production and fixed costs that remain constant. The break-even analysis allows businesses to determine if a venture will be financially viable and how changes in production, prices, or costs may impact profits. A formula is provided to calculate the break-even point using fixed costs and the difference between selling price and variable cost per unit.

Uploaded by

Sonia Yadav
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Calculating a break-even point

The basics of break-even analysis 1


Businesses must make a profit to survive To make a profit, income must be higher than expenditure (or costs)

Income Costs
Profit

50,000 40,000
10,000

Income Costs

50,000 60,000

Loss

10,000

The basics of break-even analysis 2


There are two types of costs: Variable costs increase by a step every time an extra product is sold (eg cost of ice cream cornets in ice cream shop) Fixed costs have to be paid even if no products are sold (eg rent of ice cream shop)

The break-even point


Variable + fixed costs = total costs When total costs = sales revenue, this is called the break-even point, eg
total costs = Rs 5,000 total sales revenue = Rs 5,000

At this point the business isnt making a profit or a loss it is simply breaking even.

Examples of costs
These vary, depending upon the type of business. Typical costs include:

Variable: materials, labour, energy Fixed: rent, business rates, interest on loans, insurance, staff costs (e.g. security)

Uses of break even analysis


Allows to decide if a business venture is financially viable Looks at what will happen if level of production changes To support an application for an external source of finance e.g. loan or mortgage application

Uses of break even analysis


Allows to decide if a business venture is financially viable Looks at what will happen if level of production changes To support an application for an external source of finance e.g. loan or mortgage application

Using a formula to calculate the break-even point


The break-even point =
Fixed costs

(Selling price per unit minus variable cost per unit)

Model Building Break-Even Analysis


Graphical Solution

Model Building Break-Even Analysis

Figure 1.3 Sensitivity Analysis - Break-even Model with a Change in Price Chapter 1Management 10

Model Building Break-Even Analysis

Figure 1.4 Sensitivity Analysis - Break-Even Model with a Change in Variable Cost Chapter 1Management 11

Model Building Break-Even Analysis

Figure 1.5 Sensitivity Analysis - Break-Even Model with a Change in Fixed Cost Chapter 1Management 12

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