BREAK EVEN POINT DEFN/ A process which indicates how many units a firm needs to produce in order to cover all its costs. WHY IS IT USEFUL? 1.Identify how many sales (# of units) are required 2.To see what will happen to this # is prices/costs increase or decrease 3.Calculate by how many units a firm can miss its target by, and still be safe (known as the margin of safety)

Fixed Costs Construction Company that makes houses Office & Equipment $ Advertising $ Variable Costs If they produce 1 house…. Materials $100 Labour $200 Land $500 For each house they must charge at least [$100 + $200 + $500] + [$ $500] = $2300 This price of this one house must contribute to the entire fixed cost fee (ie $1500 ) If they produce 2 houses …. Variable Costs Materials $100 Labour $200 Land $500 Variable Costs Materials $100 Labour $200 Land $500 For each house they must charge now at least [$100 + $200 + $500] + ( [$ $500] / 2) = $1150 the entire fixed cost fee is now covered by the contribution of 2 houses (ie $750 each) Don’t copy down any of this !

Recognise this?

How do I know how much stock to order? You could do some research? Primary : Pick a sample – ask how many might plan to purchase. Say 50%. Secondary : figures show 300 people came last year Therefore order stock for about 150. Alternatively you could work out your break even point. The first step is to identify our fixed & variable costs.

Advertising $150/5= $30 & uniforms $10 = $40 Stock = $5 Then we need to establish the price. : Lets say $7 So we know from each bottle we sell, $5 needs to cover the Variable Cost. $2 is left over. This cant be profit because … $40 Fixed Costs !!! This $2 is what we call ‘contribution’

Contribution is defined as a formulae …. = Sales Price – Variable Cost The first Bottle of wine we sell will make a contribution of $2 – which will go towards covering the Fixed Costs The Fixed Costs will now be $38 remaining The 2 nd Bottle of wine we sell will make a contribution of $2 too, and the Fixed Costs will go down to $36 remaining etc etc Break Even Point = Fixed Costs Contribution Check it ….. = 40 = 20 Bottles wine [ at least] 2

Variable Costs Materials $100 Labour $200 Land $500 Average Variable Cost = Variable Cost Per Unit = [$100 + $200 + $500] = $800 Fixed Costs Office & Equipment $ Advertising $ Total Fixed Cost = [$ $500] = $1500 Cost Plus Pricing = Variable Cost Per Unit + %Mark-up = [$800] + [10% = $80] = $880 Contribution = Price - Variable Cost Per Unit = [$880] - [$800] = $80 Break-even = Total Fixed Cost = 1500 = = 19 houses Contribution 80 Do copy down all of this ! In fact in all exam question you get given the price!