How much is it?

1. How much is it? Pricing you good or services so that you make a profit – one that will keep you in the lifestyle you wish to become accustom to!

2. Setting prices • We need to set a price that customers will be willing to pay and it must cover all our costs but it must also make a profit. • After all, people go into business to make a profit.

3. Pricing • It is one of the more tricky areas of business. • Prices can be determined by • what your competitors charge, • the government, • your costs.

4. Break Even Analysis • Prices can be calculated using costs that the business pays. • Cost is different to what we pay for stock or materials because it’s the unit cost not the total cost we use. • The business buys 500 yo-yos which total $1250. • But sells only one! Which means they have only incurred $2.50 cost of goods sold because the rest of the yo-yos still belong to the business.

5. Fixed and Variable Costs • Costs are divided into: • Variable • Fixed for the purpose of Break Even Analysis

6. Variable costs - examples • Materials used to make the goods: • Wood made into a wooden toy. • Freight to get the toys to the shops. • Chemicals to make toothpaste. • or used to perform the service: • Fuel for the mower in a lawn mowing business.

7. What are we selling? • We are selling toothpaste for chickens. • It cost $50.00 to make per tube. • This is expensive but good.

8. Work out Total Variable cost • Variable costs are those which vary directly with the amount of goods or services sold.

9. Go to Break Even Exercises – Variable Costs

10. Graphing Variable Costs • If we take the information from the table, we can create a graph… • …where the line increases with every sale.

11. Variable Cost Graph

12. So? • The graph shows that every time we sell a tube of toothpaste, variable cost rise. • If we sell no toothpaste, we incur no variable cost. • If we sell 50 tubes of toothpaste, variable cost is $2500.00 (or 50 tubes by $50.00 each).

13. The other Costs • If it is a cost which is not used up with each sale, then it is NOT a variable cost. • But what is it?

14. Work out Total Fixed Costs • Fixed costs are those payments which have to be paid regardless of the number of sales you make. Wages $2000.00 Rent $1000.00 Lease payments $500.00 Telephone $150.00 Total $3650.00

15. Fixed Costs

16. Go to Break Even ExercisesFixed Costs

17. Graphing Fixed Costs • Again when we put the information from the Fixed Cost table into a graph…

18. Fixed Cost Graph

19. And? • This time we get a straight line because Fixed costs don’t vary with the number of sales. • If we make one sale, Fixed Costs are $3650 and if we make 100 it is still $3650

20. Total Costs • If we graph Fixed Costs and Variable Costs, we get Total Costs per unit…

21. Total Cost Graph What’s the green line? Total costs

22. Recap - Do we know the difference between Variable and Fixed? Flour = 50¢ per pizza Meat = 60¢ per pizza Cheese = 90¢ per pizza Petrol = $2.00 per pizza Rent $600 Wages $400 Variable Cost 50¢ + 60¢ + 90¢ + $2 = $4 Fixed Cost $400 + $600 = $1000

23. What did you notice? • Variable costs are usually smaller than Fixed. • Variable costs are usually ‘per’ something. • Fixed costs are larger than Variable. • Fixed costs are total amounts.

24. Break Even Point • This is the point at which revenue (income) equals expenses (costs). • That is, there is no profit or loss made. • If the selling price of our items is $100.00, then…

25. Calculating Break Even Point Total Fixed costs Selling price - Variable Costs per unit 3650.00 = 73 units 100.00 - 50.00

26. This means… • When the business sells 73 units of toothpaste there will be no profit or loss. • If the business sells less that 73 units, there will be a loss which is recorded in brackets. • If the business sells more than 73 units, it will make a profit. The more it sells, the more profit.

27. How it works: Sales less Total costs = Profit or loss

28. Go to Break Even Exercises Break Even

29. If we put all the graphs together • We can see where the Break Even Point is…

30. At 72.70 units Break Even Point

31. Break Even Point – Profit & Loss Statement Revenue is earned by the business when they sell stock / goods. Expenses are payments for things the business does not own but need to make revenue.

32. But… • We want to make a profit! • We want to have money to take home! • We want to buy a Porsche!!! • So we use a different formulae…

33. Calculating the selling price to make a profit Total Fixed costs + Profit Selling price - Variable Costs 3650.00 + 2000.00 = 113 units 100.00 – 50.00

34. Result • The business has to sell more units to cover costs and make the profit.

35. Go to Break Even Exercise - Profit

36. Go to Break Even Exercise – Profit & Loss Statement