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Breakeven Point

Breakeven Point. When you make a product, you need to know how many you need to make and sell to make money. This critical point is known as the Breakeven Point. It is where you have sold enough items to break even.

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Breakeven Point

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  1. Breakeven Point

  2. When you make a product, you need to know how many you need to make and sell to make money. • This critical point is known as the Breakeven Point. • It is where you have sold enough items to break even. • The bigger the profit margin per item – the less items you need to sell to breakeven.

  3. Types of Costs • Fixed Costs • These remain the same even though production levels may change. • Rent, insurance, rates, taxes etc. • Variable Costs • These are costs that are linked to production and will change when production levels change. • Cost of materials, wages, power etc.

  4. Profit / Loss • In business you want your income to be larger than your costs – this way you make a profit.

  5. Variable Costs 75+55+25 = $155 Fixed Costs 24000 + 5000 + 75000 = $104,000 Total Income = selling price x number sold Total Income = 200 x 5000 = $1,000,000

  6. Total Costs = (variable cost per unit x number of units sold) + TFC Total Costs = (155 x 5000) + 104,000 = 775,000 + 104,000 = $879,000 Profit or Loss ? Because your income is higher than your total costs – you must have made a profit. Profit / Loss = total income – total costs = 1,000,000 – 879,000 = $121,000

  7. Finding How Many Items You Need To Sell To Breakeven • Using this method you can work out the minimum number of items that you need to sell to breakeven. • You can do it by using formulas and by drawing graphs. • The graphing method uses GC.

  8. The amount of money you make per unit - i.e. your profit per item

  9. Marginal Income Per Unit = Selling Price per unit– Variable Cost per Unit MIPU = 200 – 155 = 45 Number required to Break Even = Total Fixed Costs/ MIPU B/E = 104000/45 =2311.11 – so 2312 Surfboards

  10. Graphing • You can also graph these things – giving a better picture of what is going on. • The book shows how to do it by hand – we will use GC for all the graphing. • You will need to get used to how to enter the data and then apply this to all questions.

  11. Where the lines cross is the breakeven point

  12. Using the Graphic Calculator • You need to identify what is being made and call that x. (that’s right algebra!) • You use the graphing function • Go to GRAPH and hit exe. • You will see Y1, Y2 etc.. These are the lines that will be drawn. • So you need to convert the question into a form that can be entered into the GC.

  13. The number of items being made is x. These are entered into your calculator as Y1 and Y2

  14. If you get the calculator to draw this by pushing F6 – you probably wont see anything as the scales need to be set. • You need to hit SHIFT F3 to set the viewing window. In this case set: • x min to 0 • X-Max 20000 • Scale 1000 • Y-min 0 • Max 300000 • Scale 1000

  15. To find the intersection – which tells us the break even number you hit: • F6 to draw it • SHIFT G-Solve (F5) • ISCT – F5 • It will trace the graph and tell you where it intersects – this case it shows x=12000 – which is 12000 items to break even.

  16. If you are asked to sketch the graph you need to find: • The intersection as completed on the previous slide. • Y intercept – G-Solv (F5) and then F4

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