38 Break even

==break even analysis== - compares a firms revenue with its fixed and variable costs to identify the minimum level of sales needed to cover costs. this can be shown on a break even chart

calculating break even;

requires knowledge of

• selling price of product
• fixed costs
• variable costs per unit

==fixed costs-== expenses that don’t change in response to changing demand of output. examples; rent, salaries

==variable costs== - change in relation to changes in demand and output. an increase in demand will increase variable costs but fixed costs will stay the same. examples; raw materials, piece-rate labour, delivery costs, packaging supplies and credit card fees

break even formula;

$break even output = fixed costs / ( selling price per unit - variable costs per unit)$

==contribution==- ( as shown above in break even output formula) its the selling price per unit - variable costs.

contribution formula;

contribution is useful for businesses that are responsible for a range of products

$contribution per unit = selling price - variable costs per unit$

$total contribution = contribution per unit X quantity sold$

total contribution is a more simple way to calculate profit; $total contribution - fixed costs = profit$

break even charts;

break even chart shows the revenue and costs for a business at all possible levels of demand or output

side ways represents the output per time period eg. between 0 and 1000 units a month

the long ways shows costs and sales in pounds.

==the margin of safety== - amount of which demand can fall before the firm starts making losses. its the difference between current sales and the break even point. there higher the margin of safety the less likely a loss making situation will develop

How changes in business circumstances can affect the break-even chart

internal factors;

• extra launch advertising - fixed costs can then rise, so total costs rise and the break even point rises
• planned price increase- revenue rises more steeply, breakeven point then falls
• use of more chancery and less labour in production - fixed costs rise and variable costs fall, uncertain affect on break even point

external factors;

• fall in demand - break even point is not affected but margin of safety is reduced
• competitors actions force price cut- revenue rises less steeply and break even point rises.
• fuel costs rise - variable and total cost rises and break even point rises

the effects of changes in price, output and costs;

break even chart is a method that helps show when changes are planned. e.g. when business is considering price increase

main changes;

• impact on rev, profits and break even of a change in price
• impact on rev and profits of change in demand- could be because product is less fashionable
• the effect of rise or fall in variable costs like raw materials
• effect of rise or fall In fixed costs like when business chooses to ‘downsize’ to smaller and cheaper head office

summary for how it’ll be shown in chart;

1. prices can go up and down. if price is increased, the rev line starts in the same place but rises more steeply
2. fixed costs can rise or fall, so a new horizontal ( side ways) Line might need to be drawn. but the change in fixed costs will also affect the total costs line
3. variable costs can rise or fall. an increase will make the variable cost line rise more steeply, but it will start at the same point - at fixed cost line. change in variable costs will change the total costs line as well

these will all alter the break even point ^^^^

strengths of break even ;

• simple to understand
• useful fro small new established businesses where managers may not be able to employ more sophistocated techniques.
• can estimate future level of output that they need to produce and sell In order to meet profit objectives
• decisions on whether ton produce their own products or purchase from external sources

weaknesses;

• model is simplification. it assumes variable costs will increase constantly and ignores benefits of bulk buying.
• assumes firms sells all outputs at single price- firms offer discount for bulk buys
• assumes all outputs are sold.

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