Transcript 10a. Break Even Analysis

Break Even Analysis
Break-Even Analysis
• Homework take up
– Mark-Up Analysis
– Fixed Costs
– Variable Costs
Break-Even Analysis
• This is the very first step in calculating the
price at which to sell a product or service
• Marketers will play with different prices in
order to see how many sales need to be made
in order to make the companies cover all of
their costs
• In order to calculate the Break-Even Analysis
– Need to know Variable Costs (VC) & Fixed Costs
(FC)
Break-Even Analysis
• The number of units that a business must sell
at a given price to cover its costs
• Once the variable costs are covered – the rest
of the “gross profit” goes to pay off the fixed
costs
– Gross profit is the amount the company makes on
every unit sold (selling price – purchase price)
Break-Even Analysis
• A teddy-bear manufacturing company sells its
bears to retailers for an average price of $18.
The variable costs are $3 per bear. The
company’s fixed costs are $150 000. How
many bears need to be sold before the teddybear manufacturer turns a profit?
Break-Even Analysis
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BREAK EVEN POINT (BEP) = fixed costs / gross profit
BEP = 150 000 / (18-3)
BEP = 150 000 / 15
BEP = 10 000
• Therefore, after selling 10 000 bears, the company
will turn a profit
Break-Even Analysis
• (Sales Price) * (# of Units) = (Variable Costs) * (# of Units)
+ Fixed Costs
• 18x = 3x + 150 000
• 18x -3x = 150 000
• 15x = 150 000
• x = 10 000
• Therefore, the company needs to sell 10 000 bears to turn
a profit.
Break-Even Analysis
• Graphing Break-Even Analysis
Dollar Value
– MATH TIME!!! (go back to grade 9 or 10 math)
– You will graph both the revenue and the costs
– Bear Example
COSTS = 3x + 150 000
300 000
REVENUES = 18x
200 000
100 000
10 000
# of Units
Break-Even Analysis
• Another example:
- A new pizza place has opened up across the street
from BCI. Each piece of pizza costs them $0.75 of
materials to make. The business paid $50 000 for
ovens, the building, advertising and other fixed
costs. They expect to sell roughly 100,000 pieces
of pizza in their first year of operation.
- Based on their estimates, how
much should they charge in order
to make their money back in the
first year?
Break Even Analysis
• The company must decide if the break-even point
is realistic or not.
• If not there are many things that can be done
– Reduce the Variable Costs
– Increase the Price
– Decrease the selling price to
increase the demand
– Increase the fixed costs in order
to stimulate demand
• Increase Advertising
Economies of Scale
• The more products a company makes, the
lower the cost of product of each item
– Picture a new company that makes its own playing
cards – each pack may cost nearly $10 to produce
– But Bicycle makes theirs for pennies per pack
Diseconomies of Scale
• Remember: Getting bigger isn’t always better
• At some point – a company becomes too big
in order to run efficiently
– Have a hard time responding to the demands of
their consumers & controlling the quality of the
product (American Auto Industry)
Break-Even Assignment