Starter - Recap Lesson Objectives:

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Presentation transcript:

Starter - Recap Lesson Objectives: To show the effect on break-even if revenues or costs change. Starter - Recap

Using Break-even to plan for success Part 7 Using Break-even to plan for success

Lesson Objective To be able to explain the value of Break-even analysis. To explain the impact of changes to the break-even point on a business.

The Value of Break-even Be able to work out he break-even point is a valuable tool for a business to have when planning for success. If it is thinking of launching a new product, then it can work out how many units it needs to sell in order to cover its costs. It will then know if it realistic to launch the product or not!

Activity 1

Impact of Changes on a Business Activity 2 The effects are: An increase in fixed or variable costs causes the break-even point to increase. A decrease in fixed or variable costs causes the break-even point to decrease. An increase in the selling price causes the break-even point to decrease. A decrease in the selling price causes the break-even point to increase. If any of these changes take place, the business will need to take appropriate actions to be successful. What do you think they should do?

When Fixed costs change Activity 3 Fixed costs do not normally change in the short term, but there are exceptions: The rent may increase. You may have to increase your employees’ salaries. The cost of insurance may increase. If any of these changes occur what will happen? Break-even point will increase. You’ll have to sell more to make a profit. Your profits could fall.

When Variable Costs Change Activity 4 The two main variable costs are your labour and your materials. These costs may change because: Your supplier may increase the purchase price of your materials. You may waste a lot of material – faulty goods or manufacturing. The government may have increased VAT. You may have given your employees a wage increase. You may be paying more overtime. Still in your groups, consider the changes in variable costs. Discuss: Whether it is possible to avoid the increase in costs and, if so, how? If it is possible, are there any consequences you should be aware of? If it is not possible to avoid the increase, what actions could you take to either decrease other costs or increase your sales?

When Selling Prices Change Activity 5 A business has more control over its selling price than costs! Why might you increase your selling price? Why might you reduce your selling price? There may be several reasons why you are forced to reduce your selling prices: A competitor has a big promotion on and is attracting all your customers. You are simply not selling your product because they are too expensive.

Recap