What does Break Even Analysis tell you? Why does this matter?
Ever wondered how many i-Phones Apple needs to make to cover costs and start making a profit?
Let's get our heads around break even! It can be worked out in 3 different ways...
First, the 'table' method -
Davis, Taylor & Ram are a firm producing clocks. It has overheads (fixed costs) of £100 per year, production costs (variable costs) of £10 per clock, and sells the clocks for £15 each.
Draw a table like the one below and see if you can fill it in using the information above! Remember, the break even point will be the number of clocks needed to make sure sales revenue matches total costs exactly...
1) What was the break even point? How many clocks need to be made to break even?
2) What would be the profit or loss at 150 clocks made?
3) Why is knowing the BEP useful?
Method 2 - Drawing a chart...
Mr Coakley believes that he can sell burgers in his take-away for £2 each. His fixed costs are £100 per week and his burgers, rolls and relish etc. (variable costs) are 80p per burger.
Draw a chart on some graph paper like that below. Label the X axis as 'No of Burgers sold' and the range from 0 to 150. On the Y axis, label it 'Sales / Cost' and go from £0 to £200. Next draw on a fixed cost, total costs and sales revenue line based on the data above the burger picture! You might want to consider working out fixed costs, total costs and sales revenue for 0, 50, 100 and 200 burgers sold!
Your chart should look a little like this...
1) What was the break even point? How many burgers needed to be made to break even?
2) Name two factors that might change the break even point?
Method 3 - Using a Formula...(quickest way)!
Let's practice this...
Ed O’Hare runs a hairdressing salon. He has to pay £3000 per year for rent, rates, wages of permanent staff and heating and lighting (what costs are these?). He has calculated the variable costs to be £1 per haircut. He intends to charge £7 per hair cut.
1) What is the BEP?
2) What are the possible disadvantages of over relying on BEP analysis?