3.3 Breakeven PDF

Preview

Summary

Download 3.3 Breakeven PDF

Description

Overall Objective Break-even Analysis

Lesson Outcomes Calculate contribution per unit and break-even quantity Identify the different parts of a break-even chart Draw a breakeven chart. Burj Dubai Case Study Burj Dubai tower sets records and makes profits ‘As of today we have sold 90% of the building,’ said Mohamed Ali Alabbar, chairman of the property company that constructed the world’s tallest building. ‘Originally we thought that we would be lucky to break even.’ Completing such a huge building during one of the world’s biggest economic downturns was not ideal, but the revenue from the sold apartments and office space is on target. Selling only around 80% of the space available would have meant that the construction company, Emaar, would have just broken even. But by attracting and retaining the interest of enough corporations so that only 10% of space was vacant meant that the Burj Dubai is already profitable – in the week it was completed. ● What is the difference between ‘revenue’ and ‘profit’? ● What do you think ‘breaking even’ means? (formula) Challenge Question ● If only 80% of the Burj Dubai office space and apartments had been sold, would you have advised the developers to reduce prices of the remaining space? Important Terms: Contribution per Unit - refers to the difference between the selling price per unit and variable cost per unit. Contribution per unit = price per unit - variable cost per unit. If the sales price is $20 per unit and the variable costs are $12 per unit. What is the contribution. The term contribution comes about as it is how much per unit is being made to pay the firms fixed costs. Knowing the contribution firms can calculate their break-even quantity.

BREAK EVEN Break-even quantity is calculated by:

BEQ =

Fixed Costs____________ Sales Price per unit- Variable costs per unit = (contribution)

Problem: If the sales price is $20 per unit, the variable costs $8 per unit, and fixed costs are $2,400. What is the BEQ?. Congrats! Pat yourself on the back. Our goal is to draw a break-even chart costs

Draw a breakeven Chart on board. Using information in chart below. Points to explain. Labeling of the Axis Between 10-15 intervals Shape of fixed cost line Shape of total cost line Shape of total revenue line.

Steps: 1. Calculate breakeven - you can verify on graph 2. Determine interval for x axis (use current or maximum production as last interval.)

3. Determine the total revenue to use on Y axis using Price X Quantity (maximum or current production). Determine the intervals keeping in mind total revenue.. 4. Take the maximum sales revenue figure on the Y axis and and triangulate with the maximum/current production and draw the TR curve from 0. 5. Draw fixed costs curve. 6. Calculate total variable costs at the current/maximum production. 7. Calculate the total costs by adding the total variable costs and the fixed costs. 8. Draw the total cost curve 9. Make sure and label the Y axis “Revenue and Costs” and X axis “output” 10. Label the Break Even Point 11. Label the Margin of Safety 12. Label profit Sales price per unit

$16

Variable cost per unit

$6

maximum production

1000 units

current production

800 units

fixed costs

$4,000

YOUR TURN Sales price per unit

$10

Variable cost - metal

$4

maximum production

1000 units

current production

700 units

fixed costs

$3,000

Sales price per unit

$20

Variable cost - metal

$14

maximum production

800 units

current production

600 units

fixed costs

$3,000

and/or to stretch yourself Sales price per unit

$20

Variable cost - metal

$12

Variable cost- wood ($2 per kilo, 2 kilos used in each unit) maximum production

4,000 units

current production

3,000 units

fixed costs

$6,000

What is the total profit made? What would be the total profit if 3,500 units were produced?

Date: 11 Feb

Overall Objective BREAKEVEN CHARTS

Class Objectives: Draw a fully labeled break-even chart Identify: ● the margin of safety ● break even point ● profit Key Term: Margin of safety - the number of units that are being produced above the break-even level of output. MOS = Current production - BEQ Identify from overhead the margin of safety, break-even point, and profit

Before start - what will be intervals on axis’ and the highest number on the axis’.

Question 1 ● Fixed costs $10,000 ● Maximum capacity 10,000 units ● Current production 8,000 units ● Variable costs: Material $2 per unit Direct Labor cost $2 per unit ● Selling price $10 per unit 1. Draw a break-even chart using these data. 2. Show the break-even point and identify the break-even level of output.

Question 2 The following data relate to a single-product business: ● direct labour per unit $12 ● direct materials per unit $18 ● variable overheads per unit $5 ● fixed costs $200 000 ● selling price $45 ● maximum capacity of the factory is 30 000 units. 1. Draw a break-even chart using these data. 2. Show the break-even point and identify the break-even level of output. 3. Identify from the graph the profit expected at maximum capacity. 4. What is the margin of safety at an output level of 25 000 units? 5. What is the profit or loss at a production level of 22,000 units?

Overall Objective BREAKEVEN CHARTS

Class Objectives: Draw a fully labeled break-even chart Identify: ● the margin of safety ● break even point ● profit ● be able to draw changes in fixed and variable costs.

Date: 12 Feb Total Contribution is when more than one unit is sold.

Total Contribution is calculated by: Total Contribution = contribution per unit x number of units sold If the sales price is $20 per unit and the variable costs are $12 per unit and 1,000 units are manufactured. What is the total contribution. Profit can be found then by Profit = total contribution - total fixed costs. If the contribution is $8, 1,000 units are manufactured and fixed costs are $5,000, what is the profit.

1 Draw a break-even chart using these data. [8] The following data relate to a single-product business: ● direct labour per unit $12 ● direct materials per unit $18 ● variable overheads per unit $5 ● fixed costs $200 000 ● selling price $45 ● maximum capacity of the factory is 30 000 units. 1 Show the break-even point and identify the break-even level of output. [2] 2 Identify from the graph the profit expected at maximum capacity. [2] 3 What is the margin of safety at an output level of 25 000 units? [1]

Problem Current Production Price

$10

Current production

10,000

Max production

15,000

Fixed costs

40,000

Variable cost

$4

Expand production Fixed costs

Increase by $60,000

maximum capacity

20,000

m09 Nirav estimates that fixed costs for producing the new creative packaging solutions would be as follows: • rent: $36000 • utilities: $6000 • packaging designer’s salary: $30000 • Nirav’s salary: $16000. Variable costs for the new creative packaging solutions will be $0.12 per box and the sales price will be $1 per box. In the first year Nirav estimates that Duranjaya Packaging will produce 140 000 boxes. (a) Define the following terms: (i) fixed costs (ii) variable costs. (b) Prepare a fully labelled break-even chart for Duranjaya Packaging. [6 marks]

Calculating output to achieve target profit. Target profit level of output = fixed costs + target profit contribution per unit Target profit is $40,000, fixed costs $200,000 and contribution per unit is $2 Target profit level of output = 200,000 + 40,000 2

Calculating target price Break-even target price =

fixed costs production level

+ direct cost (variable cost)

Fixed costs $200,000, production level is 100,000 and direct costs are $4 Break-even target price = 200,000 100,000

+4

target price would be 6

DELUCE CASE STUDY Problem Maysel is a specialist bicycle frame maker in Portugal that has just been taken over by Trek. Maysel has struggled over the last several years and Trek have set management a precise financial target for this year: to turn a $200,000 loss into a $200,000 profit. Maysel has annual fixed costs of $400,000, an average selling price per frame of $500, and a direct manufacturing cost of $300 per bicycle frame. 1.

calculate the output necessary to obtain the target profit

Problem Trek has taken over Maysel. Trek wants to completely revamp the production process, and will only produce 1,000 bicycles this coming year. It needs to set a target price on the 1,000 frames to breakeven. Trek, at its Maysel factory, has annual fixed costs of $400,000, and a direct manufacturing cost of $300 per bicycle frame. 1. Calculate the break-even target price

Benefits of BE analysis

1. 2. 3.

provides an easy and visual means of analyzing the financial position of the firm at a given output. at a glance able to see the profit/loss of a company at each output level changes in prices and costs can be found by calculating new costs.

Limitations 1. assumes all production sold 2. assumes all production sold at same price 3. assumes revenue and cost curves are linear 4. may not be useful in a changing business environment. 5. costs may change. 6. data must be accurate

Fred Albert had a bedpan manufacturing firm. Sales Price

$20

Maximum Production

10,000 units

Current Production

8,000 units

Fixed Costs

$60,000

Plastic Cost

$2000 per 1,000 units

Metal Cost

$3 per unit

m14 hl Selected financial information for HT for 2013: Annual fixed costs (trekking permits set by governments in Nepal, Tibet and Bhutan)

$800 000

Average variable cost per trekker (food, local guides, transport costs)

$5000

Average price charged per trekker

$10 000

Number of clients (trekkers)

300

(a) (i) Calculate how many clients (trekkers) HT would need to meet its target profit figure of $400000 per year (show all your working). [3 marks] (ii) Using the financial information provided, prepare a fully labelled break-even chart for HT for 2013. [6 marks] (b) In 2014, the following changes occurred:

• annual fixed costs increased by 20% • rising fuel costs of flights increased average variable costs by 20% per trekker. The average price charged per trekker remained the same ($10000) as did the number of clients (300). (i) Taking these changes into account, calculate the new break-even quantity and margin of safety for HT in 2014 (show all your working). [4 marks] (ii) Explain one possible response from HT to the change in the break-even quantity and margin of safety calculated in part (i). [2 marks] Draw into Graph the 2014 changes.

m14 sl Klar Klar 2. Klar Klar is a factory that bottles mineral water for use in large water dispensers. The factory is located on a hill next to a spring from where water flows naturally. Klar uses a flow production method with a production capacity of 35 million litres per year. Klar has a 60% share of the national market and also exports bottled mineral water to several

countries. A multinational company called Kaiser is interested in acquiring Klar. “If the acquisition takes place, we will expand Klar’s production to gain economies of scale; we will also add a new range of flavoured drinks that will be produced in batches and sold in 1.5 litre bottles. Our maximum production capacity of flavoured drinks will be 3 million bottles a year,” says Roman Hitschfeld, Kaiser’s Production Manager. The forecast costs for producing Klar’s new flavoured drinks are as follows: • variable cost per bottle: $0.4 • estimated sales price per bottle: $1.6 • fixed costs: $240,000. (a) Calculate for Klar’s new flavoured drinks (show all your working): (i) the break-even level of output. (ii) the margin of safety if it operates at full capacity. (iii) the profit or loss if it operates at full capacity. (b) Construct a fully labelled break-even chart for Klar’s new flavoured drinks.

[2 marks] [2 marks] [2 marks] [5 marks]

The Berkeley The Berkeley is a movie theatre owned by Ed Andrews. It shows old movies and recent independently financed films. The movies appeal to niche audiences, which would not be shown at the multi-screen cinema complex called The Max located five kilometres away. As a sole trader, Ed’s financial position is deteriorating. Only 40% of films shown at The Berkeley return a small profit. The manager of The Max phoned Ed two months ago and offered to takeover The Berkeley. Ed politely refused. Cinema attendance has declined and Ed is aware that technology is changing people’s viewing habits. Recent releases of old movies on DVD and the lower price of home cinema systems to show these movies have led evening attendances to fall dramatically. Ed has calculated the cross-elasticity of demand for movie tickets, in relation to the price of these DVDs. He found that movie attendance at The Berkeley and DVD releases were very close substitutes. Ed has just been offered a chance to be the first cinema in the region to show the second film “Film X”, of a young filmmaker called Judd Peterson. Judd’s previous movie had been a huge success. The potential demand for his “Film X” is so high that it would be shown twice at this premiere but Ed must guarantee a target profit of US$10 000. Ed anticipates selling all tickets at both showings. Ed has prepared some figures for his break-even analysis if he shows “Film X”: • capacity of The Berkeley = 1200 per showing • price of movie ticket = US$12 • fixed costs = US$12 000 (this includes target profit of US$10 000) to be split equally over the 2 showings • variable costs per ticket sold = US$6. Ed has a dilemma: if “Film X” is successful, The Berkeley will receive a substantial revenue boost as well as free publicity. This could also help Ed bring more diverse films to The Berkeley, especially little known international films, which would fulfil a long-held ambition of his. However, if he shows “Film X”, Ed risks changing the perception of customers that The Berkeley provides films for a niche market to a perception that it provides films for a massmarket2 . He is concerned that customers would expect similar movies in the future. (a) (i) Identify two characteristics of a sole trader. [2 marks] (ii) Define the term cross-elasticity of demand. [2 marks] (b) (i) Prepare a fully labelled break-even chart for The Berkeley for one showing of “Film X” at the premiere. [6

marks] (ii) Calculate the total profit of The Berkeley if it shows “Film X” twice and comment on your results. [3 marks] (iii) Using The Boston Consulting Group (BCG) matrix, explain two reasons for the manager of The Max’s decision to offer to takeover The Berkeley. [6 marks] (c) Analyse the relative importance of driving and restraining forces on The Berkeley if Ed decides to show “Film X”. [6 marks]

Case study question; DeLuce Brushes Milton Deluce was starting a shaving brush company from his home in Kettlewell, UK. He estimated that he would have the following average costs: Table A. GBP CNC lathe machine

2,500

Resin blanks

7.00 per unit

Badger Hair knots

5.00 per unit

Glue

0.50 per unit

1. To break even by producing 200 units, what would need to be the sales price? 2. If wanting a target profit of 16,000 gbp, what would have to be the sales price if producing 600 units? 3. Maximum production is 800 units and sales price is 18 gbp. Draw a breakeven graph based on the information in table A. 4. Analyze the value of break even charts to firms like DeLuce Brush.

Knowledge check 1. A product sells for £10 and the variable costs are £8.50. What is the contribution per unit? 2. A clothes retailer buys 240 jumpers for £27. The jumpers are sold for £39 each. What is the total contribution made by the jumpers? 3. If total contribution is £120,000 and fixed costs are £96,000, what is the profit? 4. If total variable costs are £450,000 and contribution is £225,000, what is the total revenue? 5. How can the contribution be used to calculate the break-even level of output?

6. How can the break-even level of output calculation be checked? 7. What effect will a price increase have on the margin of safety? 8. What effect will a fall in fixed costs have on the margin of safety? 9. State three uses of break-even analysis. 10.State three limitations of break-even analysis.

Klar Klar

The Berkeley

100,000 units – current level of production (current system) 150,000 units - the level of production per year with the new manufacturing system 250,000 units - the maximum capacity with the new manufacturing system...