LESSON 4

Brain Teaser! How many business terms can you find in the word: ‘Contribution’ = 5mins

TOPIC: TOPIC 5: OPS MGT LESSON TITLE:Contribution to Fixed Costs COMPETENCY FOCUS: Key Skills (L5): you will be able to develop your numeracy skills to calculate financial transactions of a business and to interpret financial data. Learning Objectives By the end of the lesson, you should be able to… LO1) To recall the formula used to calculate contribution to fixed costs LO2) To calculate contribution to fixed costs using formula

Key terms from last lesson! Firms spend money making their products. These are called costs. Variable costs = Change depending on output. Fixed costs = remain the same no matter how much is produced. Total Costs = Fixed Costs + Variable Costs. Firms get money from selling their products. This is called sales revenue. Total Revenue = Price Per Unit x Sales.

An important production decision… Managers need to know how much the product has cost the business to manufacture because… -One reason for this is so they can make a decision on how much to charge for the product -Should they stop, switch or step-up production to be able to cover costs ‘So, how much does the product cost to produce?’

Introduction to Break Even “A business breaks even if it doesn’t make a profit or a loss”  It is the point at which the business makes just enough revenue to cover their costs.  In other words PROFIT = 0  Businesses must make a profit to survive.

Introduction to Break Even To make a profit, revenue must be higher than costs. It is where Costs = Revenue within a business. New businesses should always conduct a break- even analysis to find the break-even point. This tells them how much they need to sell to break even.

Is the business breaking even? CoolMobile Ltd makes fun cases for mobile phones. Each case sells for £6. Fixed costs per year are £10,000 and variable costs are £2 per case (unit). The maximum cases that the company can make in 1 year is Use this data to construct a clear table.

Numeracy Task Rounding Numbers Round to the nearest thousand. First, look at the digit in the thousands place. It is 3. This means the number lies between and Look at the digit to the right of the 3. It is 7. That means is closer to than Remember The rule is, if the next digit is: 5 or more, we 'round up'. 4 or less, it stays as it is to the nearest thousand = to the nearest hundred =

Numeracy Task Rounding & Estimating Now you have a go… 1)What is rounded to the nearest ten? 2)A company made profit last year of £7,821. What is this figure to the nearest £10? 3)A theme park had 9,462 visitors last year. Round this figure to the nearest 10 visitors. 4)The distance from London to Glasgow is 418 miles. Round this to the nearest 10 miles.

Calculating Break-Even Point (BEP) There are two ways to calculate the break- even point (BEP): –USING A FORMULA (CONTRIBUTION METHOD) –PRODUCING A BREAK EVEN CHART. BREAK-EVEN POINT (BEP)= the point at which revenue equals expenditure!

CONTRIBUTION METHOD (FORMULA) This involves a two part calculation: Selling Price per unit – Variable Cost Per Unit = Contribution (Towards Fixed Costs). AND Fixed Costs / Contribution = Break-even Point.

AN EXAMPLE  If Fixed Costs = £2000, Variable Costs = £8 Per Unit, Selling Price Per Unit =£10. Then Break-even would be: Price Per Unit – Variable Cost Per Unit = Contribution (Towards Fixed Costs). £10 - £8 = £2 (Contribution Towards Fixed Costs) Fixed Costs / Contribution = Break-even Point. £2000 / 2 = products will need to be sold in order to break- even and cover all their costs.

TASK 1 Harry sets up a business to print T-shirts. The fixed costs of premises and the T-shirt printers are £3000. The variable costs per T-shirt (the T- shirt, ink, wages) are £5. Each printed T-shirt sells for £25. NOW YOU TRY!

ANSWER  Harry sets up a business to print T-shirts. The fixed costs of premises and the T-shirt printers are £3000. The variable costs per T-shirt (the T-shirt, ink, wages) are £5. Each printed T-shirt sells for £25. Price Per Unit – Variable Cost Per Unit = Contribution (Towards Fixed Costs). £25 - £5 = £20 (Contribution Towards Fixed Costs) Fixed Costs / Contribution = Break-even Point. £3000 / 20 = T-shirts will need to be sold in order to break- even and cover all their costs.

LET’S TRY AGAIN! A business making and selling Hoovers has the following costs: Fixed Costs£50,000 per year Variable Costs£3.70 per t-shirt Selling Price£12 each Calculate the break-even point?

ANSWER… Price Per Unit – Variable Cost Per Unit = Contribution (Towards Fixed Costs). £12 - £3.70 = £8.30 (Contribution Towards Fixed Costs) Fixed Costs / Contribution = Break-even Point. £50,000 / 8.30 = 6,024 6,024 Hoovers will need to be sold in order to break-even and cover all their costs.

TASK 2 Produce an instruction booklet that teaches a local business owner how to calculate their break-even. [This will form part of your revision notes!]