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Understanding Breakeven Analysis: Key Concepts and Calculations for Success

This lesson explores breakeven analysis, a crucial financial tool for determining when a business covers its costs. Learn about sales revenue, fixed and variable costs, and how to calculate the breakeven point using the formula: Breakeven = Fixed Costs / Contribution Margin. We will analyze a restaurant example, calculating the number of meals needed to reach breakeven. Additionally, uncover why understanding these concepts is vital for business success, including factors that can shift your breakeven point and background on key terms like contribution, profit, and margin of safety.

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Understanding Breakeven Analysis: Key Concepts and Calculations for Success

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Presentation Transcript

  1. This lesson will be about...BREAKEVEN What is Sales Revenue?

  2. NO IDEA I NEED HELP NEVER HEARD OF IT OK I CAN DO THIS WITH SUPPORT SOME GUIDANCE NEEDED NEARLY AT MY TARGET GOT IT! VERY CONFIDENTWILL HIT MY TARGET GRADE EXCEED TARGET LEARNING OBJECTIVES Explore breakeven and how to shift the breakeven point

  3. GLUE Key Terms* • Break Even:Number of units that must be sold in order to produce a profit of zero (but will recover all associated costs).(Break Even = Fixed Cost / contribution per unit) • Profit (or Loss):The monetary gain (or loss) resulting from revenues after subtracting all associated costs. (Total Revenue - Total Costs) • Contribution The contribution is the amount of income less direct costs. (Contribution Cost = Unit Price - Variable Unit Cost) • Revenue (Unit Sales * Unit Price ) • Margin of safety shows how far sales can fall before losses made.

  4. Break even analysis depends on the following variables • The fixed costs for a product. • The variable costs for a product. • The product's unit price. • The product's expected unit sales [sometimes called projected sales.]

  5. Watch Co.

  6. The Formula • Contribution = Unit Price - Variable Unit Cost • Break Even = Fixed Cost / Contribution • Break Even = 2500/(85-20) [38.5]

  7. Break even Chart Calculator • Question: • Restaurant Sells 600 meals at $24 each. The meals cost $8 each to prepare. The restaurant also pays fixed costs of $8500. • Calculate Breakeven. WORK THIS OUT USING THE FORMULA...

  8. Question • Restaurant Sells 600 meals at $24 each. The meals cost $8 each to prepare. The restaurant also pays fixed costs of $8500. • Calculate Breakeven.

  9. Answer • Restaurant Sells 600 meals at $24 each. The meals cost $8 each to prepare. The restaurant also pays fixed costs of $8500. • BREAKEVEN Fixed costs = 8500 / (24 – 8) =531.25 (so this restaurant would need to sell and prepare 532 meals to breakeven. Why 532 not 531?

  10. http://www.youtube.com/watch?v=TLOo2mY6FIw How to draw a breakeven chart

  11. Copy & label in your books ? ? ? ? Fixed costs, breakeven, sales, variable costs, output, quantity ? ?

  12. RULERS CALCULATORS

  13. What factors can cause a shift in the break even point?

  14. Why is it important that we keep an eye on our Breakeven point?

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