# Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

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Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)

Explain break-even point.

 Childhood lemonade stand Who provided your materials? How much did you charge? Did you break even?  Breaking even = important for businesses  Must be able to cover costs  And hopefully—make a profit! Lemonade 50¢ Lemons Ice Sugar Cups Stirrers Water

 Art club bake sale \$.75 per dessert item \$12 in costs The club breaks even after selling 16 items. No loss, no gain  Break-even point = when the club makes enough money to cover costs and begins to make a profit Will earn profit as costs stay the same Breaking Even

 Businesses reach break-even point when total sales income at a given selling price equals total costs.  Must calculate total costs and estimate sales revenues to project break-even point

 Predictable business costs that don't change when sales go up or down such as: C o s t s Taxes Rent or mortgage payments Equipment payments or leases Wages and salaries Depreciation of physical assets Fees and licenses Interest on loans Insurance

 Costs that change along with changes in sales volume  If sales go up, these costs increase.  If sales go down, these costs decrease. Shipping Supplies Cost of goods Promotional costs Sales tax Raw materials Business travel Sales commissions C o s t s Components of Break-Even

 Vary to some extent in response to sales  Should be assigned as either fixed or variable for the purpose of calculating break-even C o s t s Semivariable costs Components of Break-Even

 Most businesses receive the bulk of their income from sales revenues.  Two ways that sales revenues increase: As the number of units sold increases As the selling price per unit increases Sales revenues

 A business does not make a profit until it has passed the break-even point.  This occurs when total sales revenues are greater than total costs.  A business loses money if it does not reach its break-even point and sales revenues are less than total costs. Profit and Loss

To determine when the business will begin making a profit To help set prices To determine whether to relocate the business To determine capital needs To determine what incentives to offer

Calculate break-even point for a business operation.

BP —break-even point FC —total fixed costs VCM —variable-cost margin Formula— BP = FC ÷ VCM Break-even equals total fixed costs divided by the variable-cost margin. BP —break-even point FC —total fixed costs VCM —variable-cost margin Formula— BP = FC ÷ VCM Break-even equals total fixed costs divided by the variable-cost margin.

 The amount that each sale contributes to fixed costs  Also called the fixed-cost contribution  Calculated by subtracting variable costs per unit from the selling price per unit  The amount that each sale contributes to fixed costs  Also called the fixed-cost contribution  Calculated by subtracting variable costs per unit from the selling price per unit

Step 1 — Identify costs and revenues. Step 2 — Classify costs as fixed or variable. Step 3 — Total the costs in each classification. Step 4 — Calculate the variable cost per unit. Step 5 — Subtract the variable cost per unit from the selling price per unit to obtain the variable-cost margin. Step 6 — Divide the total fixed costs by the variable-cost margin to determine break-even.

 Using break-even to determine sales commissions  Darius' company Deciding between 5% and 7% No written agreements Is it ethical to change the rate?

Acknowledgments Original Developers: Sarah Bartlett Borich and Lelia Ventling, MarkED Version 1.0 MarkED Resource Center Copyright © 2007