Business Opportunity
•
•
•
•
Lunchtime pitch for a sandwich stall
Monday – Friday: 100 customers per day
Average spend per person = £5
Cost of production is about half the selling
price
• Rent for the pitch
= £1000 per week
Should I do it?
Break-even
analysis
TY - 2009
Definition
• Break Even is the point at which sales
revenue is equal to total costs. It is the
point at which the business is making
neither a profit nor a loss.
• So, break-even analysis tells a business
how much it needs to sell to cover its
costs
TY - 2009
Businesses incur two types of costs
• Fixed Costs are
• Variable costs are
TY - 2009
Businesses incur two types of costs
• Fixed Costs are the costs that do not
change in-line with the number of units
produced/sold.
• Variable costs are
TY - 2009
Businesses incur two types of costs
• Fixed Costs are the costs that do not
change in-line with the number of units
produced/sold.
• Variable costs are the cost that do change
directly in-line with output.
TY - 2009
Break-even (the point at which a
business is making neither a profit nor a loss!)
This is the formula to work out exactly how
many units we need to sell to break even
Selling price - Variable costs = “Contribution”
(per unit)
(per unit)
Total fixed costs = Break-even Point
Contribution (the number of units needed to
break-even)
“Contribution” is the amount of money each unit
contributes towards the fixed costs of business
TY - 2009
For Example:
• If a product sells for £15 and has variable
costs per unit of £11 what is its contribution?
• If the business has fixed costs of
£20,000,how many units would it need to sell
to break-even?
Each unit sold will make a contribution of £4
towards fixed costs of business.
£20,000 ÷ £4 = 5,000 units must be sold in
order to break-even
So, 5,000 units = the “break-even point”
TY - 2009
Break Even Example
Hackett’s Hair Salon
• Kenny Hackett runs a small but very
fashionable hairdressing salon. His
business has annual fixed costs of £54,000.
Kenny has calculated that the cost of
providing a standard cut, colour and style is
£40.00 and he currently charges £100 for
this service.
TASK: Complete the table on the handout
then a draw break
even
chart
TY - 2009
£ sales/costs
Break Even Chart
Sales Revenue
The break
even point
TOTAL COSTS
Fixed Costs
Variable costs
TY - 2009
Number of units
Hackett’s Hair Salon
Break Even Point
TY - 2009
Importance of
Break-even analysis
Limitations of
Break-even analysis
• Contribution from every
unit sold above the
breakeven point adds to
profits
• Breakeven point can
provide a target for a
business to exceed
• It helps to work out
whether forecasted sales
will produce a profit and
whether further
investment in product is
worthwhile.
• Does not take into account
possible changes in costs
over time period
• Does not allow for
changes in selling price
• Analysis is only as good
as the quality of the
information used
• Does not allow for
changes in market
conditions – e.g. entry of
new competitor
TY - 2009
Structure for Break Even content of P6
• Define break even and explain how this tool can
be useful when running a business.
• Explain how it can be a useful step in the
budgeting process:
– Setting sales targets
– Setting targets related to costs
– Helping to decide if a proposed deal is good
• Demonstrate the calculation of the BEP for Eco
Clothing Ltd. (show formula and working from class)
• Include the BE table you produced (include the
graph you produced as ‘Appendix A’)