Presentation on theme: "Pricing LAP 4 Explain break-even point. Calculate break-even point for a business operation. (Calculating Break-Even)"— Presentation transcript:
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?
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