Starter. DRAWING BREAK-EVEN CHARTS Part 8 Lesson Objective To be able to draw a break-even chart. To...
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Transcript of Starter. DRAWING BREAK-EVEN CHARTS Part 8 Lesson Objective To be able to draw a break-even chart. To...
Starter
DRAWING BREAK-EVEN CHARTS
Part 8
Lesson Objective
To be able to draw a break-even chart.
To be able to interpret a Break-even chart.
Break-even Charts
We know how to calculate the break-even point, but you can also draw it on a chart!
This involves drawing 3 lines: The fixed coats line The total costs line The total revenue (sales) line
Read through the sheet you have been given.
Highlight 3 questions you have!
What does the Revenue Graph look like?
Total Costs/ Revenue
£
Quantity
Total Revenue
What does the Breakeven chart look like?
Total Costs/ Revenue
£
Quantity
Total Revenue
Total Costs
Breakeven Point
Total Costs/ Revenue
£
Quantity
Total Revenue
What does the Breakeven chart look like?
Total Costs
Loss
ProfitBreakeven
Point
50 Unit
s
100 Unit
s
150 Unit
s
Margin of Safety
This is the difference between the break-even point and the current level of output.
If we produce 100 cakes the margin of safety would be:Production – Breakeven = Margin of safety
100 – 25 = 75
margin of safety is how much output or sales level can fall before a business reaches its
breakeven point.
Total Costs/ Revenue
£
Quantity
Total Revenue
The Margin of Safety?
Total Costs
Loss
ProfitBreakeven
Point
50 Unit
s
100 Unit
s
150 Unit
s
Margin of Safety
100 – 150 = 50
Plotting a Break-even graph
STEPS TO FIND OUT THE BREAK-EVEN USING A GRAPH
1. Calculate the companies costs using a simple table2. Draw the graph3. Plot fixed costs & Add variable costs to fixed costs
to get total costs. Plot it on the graph.4. Next plot revenue5. The break-even point is where revenue line crosses
the total costs line.
Break-even graphs show costs and revenue plotted against outputOutput goes on the horizontal axis (starting from 0)Costs and revenue both go on the vertical axis
Task - Evans Cricket Bats Ltd
Fixed costs = £40,000 Variable costs £20 per cricket bat Total costs = Fixed + variable costs Sales revenue = Selling price x output Cricket bats sold for £35 each
Output (No of cricket bats)
Fixed costs
Variable costs
Total costs Sales revenue
1,000 £40,000
2,000 £40,000
3,000 £100,000
4,000 £140,000
Stage 1: calculating costs & revenue
Fixed costs = £40,000 Variable costs £20 per cricket bat Total costs = Fixed + variable costs Sales revenue = Selling price x output Cricket bats sold for £35 each
Output (No of cricket bats)
Fixed costs
Variable costs
Total costs Sales revenue
1,000 £40,000 £20,000 £60,000 £35,000
2,000 £40,000 £40,000 £80,000 £70,000
3,000 £40,000 £60,000 £100,000 £105,000
4,000 £40,000 £80,000 £120,000 £140,000
Stage 2: DRAW the graph
Turn your paper so it is LANDSCAPE and copy this.
0
20000
40000
60000
80000
100000
120000
Cost
s (£
)
Output (No of cricket bats)
1000 2000 3000 4000
To be able to draw a break-even chart.
Stage 3: Showing costs on a graph.
Insert fixed costs.
Cost
s (£
)
Output (No of cricket bats)
1000 2000 3000 4000
To be able to draw a break-even chart.
Stage 3: Showing costs on a graph.
Calculate total costs.
Cost
s (£
)
Output (No of cricket bats)
1000 2000 3000 4000
Total costs
Variable costs
Fixed costs
To be able to draw a break-even chart.
Stage 4: Showing revenue on a graph
Now add revenue to your graph.
Cost
s (£
)
Output (No of cricket bats)
1000 2000 3000 4000
Total costs
Variable costs
Fixed costs
To be able to draw a break-even chart.
Stage 4: Showing revenue on a graph
Now add revenue to your graph....
Cost
s an
d s
ale
s re
ven
ue (
£)
Output (No of cricket bats)
1000 2000 3000 4000
Sales revenue
Total costs
Variable costs
Fixed costs
To be able to draw a break-even chart.
Stage 5: revealing the break-even point
Break-even is point is where revenue line crosses the total costs line.
Cost
s an
d s
ale
s re
ven
ue (
£)
Output (No of cricket bats)
1000 2000 3000 4000
Sales revenue
Total costs
Variable costs
Fixed costs
To be able to draw a break-even chart.
Break-even limitations
It assumes that the firm can sell any quantity of the product at the current price. In practice the firm may need to reduce prices to sell at high levels of output.
It assumes fixed costs never change - but as output increases the firm may need to buy more machines, get bigger premises, take on extra sales and administration staff.
It assumes that all products are sold. This doesn’t always happen; some products may only be sold at lower prices or need to be thrown away.
And to finish…
On the work sheet, complete the questions…
margin of safety is how much output or sales level can fall before a business reaches its breakeven point.
To be able to interpret a break-even chart.
