1. Store UNDER DESK 6

2. Unit 2: Business Resources
Costs and Break Even
Michelle Hopkinson

3. At the end of the session all learners will be able to:
Identify different types of costs for a given business scenario
Discuss how costs impact on profit and sales
Correctly calculate break even points for business scenarios
In addition some more able learners may be able to:
Analyse the impact of costs on the financial performance of a business

4. Types of costs
Variable 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, salaries
Brainstorm different costs
Variable – sandwich shop, bread, food, wages if paid by hour
Fixed – rent, insurance, salary

5. Activity
See activity sheet on Moodle

6. Impact of costs on profit
A business deducts REVENUE from TOTAL COSTS to determine profit
Fixed costs are ‘spread’ across how many units are sold, so if they sell low numbers, FC must still be paid for from elsewhere
This 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 costs
Eg. Selling 1,000 units at £20 each. VC £5, FC £10,000
Revenue £20,000 (1,000 x £20)
Costs 15,000 (1,000 x 5 plus 10,000)
Profit ,000
Reduce FC by: moving to cheaper premises, shopping around for utilities, reduce heating, use 2nd class mail
VC: 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 product
Reduce the costs
Reduce the price to dramatically increase sales
Increasing 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 idea
Increasing 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 is
Create a definition (one sentence)

9. Break Even Point (BEP)
The point in a business where costs EQUALS sales
This provides a business with it’s first target of covering all costs
Any sales beyond this are profit
For example:
Fixed costs are £100,000, variable costs per unit are £10, selling at £20 per unit
BEP = £100,000
(£20 - £10) = 10,000 units to sell
BEP formula: Fixed Costs
Contribution (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 BEP
This helps the business identify the amount of units sales can fall before the business starts to make a loss
Example 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 objectives
Identify different types of costs for a given business scenario
Discuss how costs impact on profit and sales
Correctly calculate break even points for business scenarios
Questions?

13. Next lesson
Break even charts
Assignment