2 Unit 2: Business Resources Costs and Break EvenMichelle Hopkinson
3 At the end of the session all learners will be able to: Identify different types of costs for a given business scenarioDiscuss how costs impact on profit and salesCorrectly calculate break even points for business scenariosIn addition some more able learners may be able to:Analyse the impact of costs on the financial performance of a business
4 Types of costsVariable Costs VC expenses that change depending on output (ie sales) Eg. Raw materials, packaging, utilities, wages Fixed Costs FC expenses that do not change, irrespective of output. These are linked to time rather than on the level of business activity Eg. Rent, insurance, salariesBrainstorm different costsVariable – sandwich shop, bread, food, wages if paid by hourFixed – rent, insurance, salary
6 Impact of costs on profit A business deducts REVENUE from TOTAL COSTS to determine profitFixed costs are ‘spread’ across how many units are sold, so if they sell low numbers, FC must still be paid for from elsewhereThis is why FC are kept low (OR changed to VC such as wages)A business uses the above (based on how many they think they will sell) to make sure their selling price will pay off all costsEg. Selling 1,000 units at £20 each. VC £5, FC £10,000Revenue £20,000 (1,000 x £20)Costs 15,000 (1,000 x 5 plus 10,000)Profit ,000Reduce FC by: moving to cheaper premises, shopping around for utilities, reduce heating, use 2nd class mailVC: use cheaper supplier, negotiate with existing supplier use less raw materials, less packaging, make staff work harder
7 Maximising income/revenue How can a business maximise income?Increasing the selling price of productReduce the costsReduce the price to dramatically increase salesIncreasing sales by marketing activity (this could lead to employing more sales staff, promotional costs)Break even will help decide if the above are a good ideaIncreasing sales income is not easy. Customers may resent price increases and not buy as many products. Reducing the price may not improve sales sufficiently to compensate for the loss of income per product.Additional marketing activities will cost more money and this does not guarantee that sales will increase sufficiently to compensate.
8 Break Even – what is it?In pairs, discuss what you think break even isCreate a definition (one sentence)
9 Break Even Point (BEP)The point in a business where costs EQUALS salesThis provides a business with it’s first target of covering all costsAny sales beyond this are profitFor example:Fixed costs are £100,000, variable costs per unit are £10, selling at £20 per unitBEP = £100,000(£20 - £10) = 10,000 units to sellBEP formula: Fixed CostsContribution (SP-VC)Contribution means how much is contributing to the FC (as this must be paid for before profit is made)
10 Let’s have a go Open the activity on Moodle called ‘Munchbox’ Calculate the BEP for each scenario
11 Margin of Safety (MOS)The Margin of Safety (MOS) is the difference between the planned level of sales and the BEPThis helps the business identify the amount of units sales can fall before the business starts to make a lossExample if the BEP was 10,000 but they felt confident (and had planned) to sell 12,000 the MOS would be 12,000 – 10,000 = 2,000 units
12 Recap objectivesIdentify different types of costs for a given business scenarioDiscuss how costs impact on profit and salesCorrectly calculate break even points for business scenariosQuestions?