Computer Optional Level 2
PURPOSE:

To learn how to perform breakeven analysis

To understand how fixed and variable costs affect the breakeven point

To perform breakeven analysis on proposed business ideas

To use technology to help identify breakeven point
MATERIALS:

Chart paper (or board) and markers
 Copies of handout: “Are Toni’s T-Shirts Greeeaaat?” (1 per participant)

Calculators (1 per pair of participants)
 “Are Toni’s T-Shirts Greeeaaat? Answers” (for facilitator)

Method for displaying answers (copies of answer sheets, overhead transparency, or computer and projector)
60-90 minutes
EXPERIENCE:
1. Divide the class into groups of 3-5 members.
2. Distribute the “Are Toni’s T-Shirts Greeeaaat?” handout, and instruct participants to read through it.
3. Briefly review the definitions of the terms: overhead (fixed costs), cost of goods sold (variable costs), contribution margin (gross profit), and breakeven.
4. Allow ~5 minutes for groups to label the expenses listed in Part A as overhead (OH) or cost of goods sold (COGS).
5. Ask one group to write their classification of the terms on chart paper or the board, and then invite other groups to share their conclusions (if they differ).
NOTE: Participants need to understand that there is not one right answer to this division of costs. However, they must be able to justify why a particular cost belongs in one category or another. One rule of thumb is that usually overhead costs are described as dollars per unit of time (month, year, etc.), while costs of goods sold are described as dollars per item sold.
6. Have groups complete Part B and report out. Discuss any differences in the answers. Be sure they understand the concept of contribution margin (the dollar amount contributed to overhead and gross profit).
Copyright
© 1992-2008 NC REAL Enterprises, Inc. TONI’S T-SHIRTS, Part 1, p. 1

7. Ask participants to complete Part C. If their division of overhead vs. cost of goods sold is different from that listed on the sheet, be sure they understand that this is one of several ways to divide the costs. Ask them to accept this division for the sake of the exercise.
8. Have groups complete parts D-I and report their answers.
9. After students have finished all the calculations, discuss answers in groups or as a class.
Display the answers (using copies of answer sheets, transparencies, or computer and projector).
REFLECTION:
Lead the discussion and debrief, based on questions such as:

Why is computing the breakeven point important to Toni? How will her breakeven point change as her business changes?

As overhead costs increase, what happens to the breakeven point?

As the cost of goods sold rises, what happens to the breakeven point?
 Does the breakeven point of sales cover the cost of starting Toni’s business?

Are you comfortable with the concept of breakeven? Could you determine the breakeven point for other ventures? For your own business?
EXPANSION AND APPLICATION:

Use this activity to prepare students for performing breakeven analysis for their own business ideas. Participants may start collecting “ball park” figures for operating expenses and costs of goods sold for their proposed business.

Breakeven is used to test the feasibility of an idea by determining sales revenue and the number of customers required to reach the breakeven point. When researching Market
Feasibility, participants determine whether there are enough customers for the proposed business to succeed.
Copyright
© 1992-2008 NC REAL Enterprises, Inc. TONI’S T-SHIRTS, Part 1, p. 2

Toni loves T-shirts. Recently she has become interested in printing her own T-shirts. She will graduate from Great Lakes High School this spring, and she wants to know whether a T-shirt business will be a feasible way for her to help finance her tuition and book costs at Peninsula
Community College, where she’ll start business classes in the fall. She enrolled in REAL
Entrepreneurship to explore the idea further.
Toni has found some used screen-printing equipment for sale, and her mother, who runs a profitable machine shop in town, is willing to loan her the money to buy it, and to rent her space in the basement of the shop. Before she plunges into her business plan, she wants to do a feasibility study to see if the idea is worth pursuing.
Toni’s main question is: How many T-shirts will she have to sell in order to pay for her books and tuition? Toni asked the other students in her REAL class to help her figure this out. They know that what Toni needs to find is her breakeven point , the level of sales she will need in order to cover her overhead costs and her cost of goods sold.
A. Below are the costs Toni anticipates for her business. Your first job is to divide these costs between those that are constant regardless of the level of sales (overhead costs, or OH) and those that are directly involved in producing the T-shirts (cost of goods sold, or COGS).
Discuss the expenses below with your group, and classify each as OH or COGS.

Ink

Rent

Loan Payment (to repay her mother)

Insurance

Sales commission paid to a salesperson (10% of sales)

Blank T-shirts

Phone

Utilities
 Owner’s draw

Office Supplies
Copyright
© 1992-2008 NC REAL Enterprises, Inc. TONI’S T-SHIRTS, Part 1, p. 3

B. Now that you’ve divided Toni’s costs between overhead costs and cost of goods sold, your next step is to figure out how much it costs Toni to produce one T-shirt. She pays $1.00 per shirt for ink, $4.00 for each blank T-shirt, and pays a 10% sales commission to her salesperson. How much does it cost Toni to produce one T-shirt?
If she sells each shirt for $8.00, how much money is left over, after her expenses? (This figure is the profit contributed per T-shirt .)
C. Next, Toni has to compute her total overhead costs. First she calculates how much money she will need to finance her tuition, books, and spending money at Peninsula Community
College, and decides she will need $400 a month (before taxes). What are her total overhead costs per month?
Rent
Phone
Loan Payment
Insurance
Utilities
Owner’s Draw
Office Supplies
$100
$200
$30
$75
$150
$400
$15
Total OH per month:
D. Calculate the number of T-shirts that Toni must sell each month to break even by dividing the total overhead costs per month by the profit contributed per T-shirt:
Overhead Costs Per Month
Profit Contributed Per T-shirt
=
Breakeven Point in number of
T-shirts per month
Copyright
© 1992-2008 NC REAL Enterprises, Inc. TONI’S T-SHIRTS, Part 1, p. 4

E. What would be Toni’s monthly sales required to break even, in dollars ? To calculate this value, multiply the number of shirts required to break even by the sales price per shirt.
T-Shirts per month x Sales price per shirt = Breakeven Point in dollars
F. How many T-shirts must Toni sell per week to break even? Assume 4.3 weeks per month
(52 weeks / 12 months = 4.3 week/month)
How many T-shirts must Toni sell per day to break even? Assume 6 days per week.
G. Toni is thinking about buying a car. She calculates that the car payment and insurance will be about $300 a month. How many T-shirts will she have to sell per month if her owner’s draw increases $300 a month to cover the costs of her car?
H. Toni decides not to purchase a car at this time, but she has found a small downtown storefront location where she believes she can sell more T-shirts. Her rent will increase to
$500 per month, but she will not have to pay a salesperson. To help attract customers, she plans to spend $100 per month on advertising. What will be the new breakeven point in number of T-shirts per month at the downtown location considering these new expenses?
I. If sales go as expected at the downtown location, Toni will be able to purchase blank T-shirts in larger quantities and reduce the cost of a blank shirt to $3.50 per shirt. How will this affect her breakeven point ? How many shirts would she have to sell to break even each month?
Copyright
© 1992-2008 NC REAL Enterprises, Inc. TONI’S T-SHIRTS, Part 1, p. 5

A. It is critical that students understand that there is no one right answer to this division of costs.
However, they should be able to explain their thinking. One rule of thumb is that usually overhead costs are described as dollars per unit of time (month, year, etc.), while costs of goods sold are described as dollars per item sold.
B. $1.00 + $4.00 + $0.80 = $5.80
$8.00 - $5.80 = $2.20
C. $970
D. $970.00/$2.20 = 441 shirts/month
E. $441 x $8.00 = $3528
F. 441 / 4.3 = 103 shirts/week
103 / 6 = 18 shirts/day
G. $970 + $300 = $1270
$1270 / $2.20 = 578 shirts/month
H. $970 + $500 (extra $400 for rent + $100 for advertising) = $1470
The cost of each T-shirt decreases to $5 since Toni does not have to pay a salesperson a
10% commission. This means that the profit per shirt is now $3.
$1470 / $3.00 = 490 shirts/month
I. $3.00 + $0.50 = $3.50 amount contributed per shirt (Cost of each shirt is now $4.50)
$1470 / $3.50 = 420 shirts/month
Copyright
© 1992-2008 NC REAL Enterprises, Inc. TONI’S T-SHIRTS, Part 1, p. 6