Y11 ICT
Modelling
The Breakeven Model
Often, when making models using spreadsheets, we need to calculate the break-even
point. This is where we go from making a loss on something to making a profit. For
example, in the school production, the person in charge will want to know how much
to charge for a ticket so that the school does not lose money on it. They will take into
account the number of tickets they will sell as well as the cost of putting on the
production itself.
Cost types
There are two types of costs you need to be aware of:
FIXED COSTS – these are the same no matter how many people turn up/items are
produced. An example of this would be the cost of disco hire – it doesn’t matter how
many people turn up, it still costs the same to hire the disc.
VARIABLE COSTS – these change depending on how many of an item is produced.
Consider, if everyone who turns up to the disco is given a free drink. This would
change depending on how many people turn up to the disco. The more people who
turn up, the more it costs.
You are going to make a break even model for a school disco.
1.
Enter the details as shown in the
spreadsheet.
Variable costs are calculated by
multiplying cost of drinks by
number of tickets sold.
Fixed costs are £400 – make sure
you put in a formula to refer to cell
B2.
Total costs is calculated by adding
the variable costs to the fixed costs.
Income is calculated by multiplying
no of tickets sold by ticket price.
If the income is greater than the
costs, then a profit is made. If the
income is less than the costs then a
loss is made. You need to enter an
IF function into the profit/loss
column to work out whether you
make a profit or loss.
Y11 ICT
2.
Copy the formulae down (make sure
you’ve used absolute
references/names cells for the fixed
cost, cost of drinks and ticket price).
Your spreadsheet should look like
the one opposite.
As you will see, if we sell 300
tickets, we make a loss. If we sell
350 tickets, we make a profit. The
break-even point is therefore
somewhere between these two
points.
3.
We need to modify the model we
have made. As shown opposite,
enter the new information into
columns E & F.
We also need to change how the
“tickets sold” is done. Rather than
entering numbers, we can calculate
this figure. In my example, the “50”
in B8 would be replaced by the
formula:
=E2+$E$3
4.
We can now use a formula to
replace the “100” and the rest of the
figures. This is equal to the
previous no of tickets sold plus the
increment (E3). Don’t forget you
need to use absolute references ($
signs).
Copy the formula down so it covers
all the number of tickets shown
before – they should be exactly the
same in terms of numbers. The
difference is that they are now
calculated, not entered.
5.
We can now use this model to help
us find the break-even point for the
school disco. From before, we
knew that the break-even point was
somewhere between 300 and 350
tickets. If we change the base
number of tickets to 300 and the
increment to 10, you should see the
following happen:
Modelling
Y11 ICT
6.
Modelling
We now can see that the break-even
point is between 320 and 330. We
can even refine this further using
315 as the base number of tickets
and 1 as the increment.
As you will see, we need to sell 321
tickets before we make a profit.
This is based on the disco costing
£400, a £2 ticket price and everyone
coming getting a free drink costing
£0.75
7.
Now that we have a model set up,
we need to make two final changes
to make the model easier to use.
Add two spinners to your sheet.
The first should change the number
of tickets. The second should
change the increment. You will
need to set the increment, minimum
and max values.
This is designed to make it easier for
non-specialists to use.
Using your model.
Workout the break-even point for the following situations:
1.
Disco costs £100, drinks are £0.30, ticket price is £1.50
2.
Disco costs £200, drinks are £0.50, ticket price is £1.25
3.
Disco costs £180, drinks are £0.60, ticket price is £1.60
Produce a chart showing total costs and income. It should look similar to the one
below. The point where the two lines cross is the break-even point.
£660.00
£655.00
£650.00
£645.00
£640.00
£635.00
£630.00
£625.00
£620.00
Total costs (£)
No of tickets sold
327
326
325
324
323
322
321
320
319
318
317
Income(£)
316
Revenue
Break-even for school disco
Y11 ICT
Modelling
Creating a new model.
“Big Speakers Ltd” make car hi-fi speakers. They are about to introduce a new
product, “The Superblaster”, but don’t know what they breakeven point will be on it.
They think that it will cost £2000 for the machine to make the speakers and that the
parts needed for each speaker will cost £15.00. They would like to sell each speaker
for £24.99. You need to create a model that “Big Speakers Ltd” can use to calculate
how many speakers they need to sell before they start making a profit. How many
must they actually sell for this to happen? Illustrate your answer with a chart.