Break Even Analysis

Break-Even Analysis Homework take up Mark-Up Analysis Fixed Costs Variable Costs

Break-Even Analysis This is the very first step in calculating the price at which to sell a product or service Marketers will play with different prices in order to see how many sales need to be made in order to make the companies cover all of their costs In order to calculate the Break-Even Analysis Need to know Variable Costs (VC) & Fixed Costs (FC)

Break-Even Analysis The number of units that a business must sell at a given price to cover its costs Once the variable costs are covered – the rest of the “gross profit” goes to pay off the fixed costs Gross profit is the amount the company makes on every unit sold (selling price – purchase price)

Break-Even Analysis A teddy-bear manufacturing company sells its bears to retailers for an average price of $18. The variable costs are $3 per bear. The company’s fixed costs are $150 000. How many bears need to be sold before the teddy-bear manufacturer turns a profit?

Break-Even Analysis BREAK EVEN POINT (BEP) = fixed costs / gross profit BEP = 150 000 / (18-3) BEP = 150 000 / 15 BEP = 10 000 Therefore, after selling 10 000 bears, the company will turn a profit

Break-Even Analysis (Sales Price) * (# of Units) = (Variable Costs) * (# of Units) + Fixed Costs 18x = 3x + 150 000 18x -3x = 150 000 15x = 150 000 x = 10 000 Therefore, the company needs to sell 10 000 bears to turn a profit.

Break-Even Analysis Graphing Break-Even Analysis MATH TIME!!! (go back to grade 9 or 10 math) You will graph both the revenue and the costs Bear Example COSTS = 3x + 150 000 REVENUES = 18x 300 000 Dollar Value 200 000 100 000 10 000 # of Units

Break-Even Analysis Another example: A new pizza place has opened up across the street from BCI. Each piece of pizza costs them $0.75 of materials to make. The business paid $50 000 for ovens, the building, advertising and other fixed costs. They expect to sell roughly 100,000 pieces of pizza in their first year of operation. Based on their estimates, how much should they charge in order to make their money back in the first year?

Break Even Analysis The company must decide if the break-even point is realistic or not. If not there are many things that can be done Reduce the Variable Costs Increase the Price Decrease the selling price to increase the demand Increase the fixed costs in order to stimulate demand Increase Advertising

Economies of Scale The more products a company makes, the lower the cost of product of each item Picture a new company that makes its own playing cards – each pack may cost nearly $10 to produce But Bicycle makes theirs for pennies per pack

Diseconomies of Scale Remember: Getting bigger isn’t always better At some point – a company becomes too big in order to run efficiently Have a hard time responding to the demands of their consumers & controlling the quality of the product (American Auto Industry)

Break-Even Assignment