break even analysis constructing charts
DESCRIPTION
Break Even Analysis Constructing Charts. AS Business Studies Unit 1. Aims and Objectives. Aim: Understand how to construct a break even chart Objectives: Define break even Construct a break even chart Analyse a break even chart. Starter. Define Break Even Why is Break Even Important? . - PowerPoint PPT PresentationTRANSCRIPT
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AS Business Studies Unit 1
BREAK EVEN ANALYSIS
CONSTRUCTING CHARTS
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Aim:Understand how to construct a break
even chart
Objectives:
Define break evenConstruct a break even chartAnalyse a break even chart
AIMS AND OBJECTIVES
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Define Break Even
Why is Break Even Important?
STARTER
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CONSTRUCTING BREAK EVEN CHART
Information Needed ‘Eat Your Fill’ DataWeekly Fixed Costs £2,800Variable Costs per customer (original forecasted figure)
£3
Average revenue earned per customer £10
Maximum weekly number of customers – the capacity
of the restaurant600
We can construct a break even chart to show the revenue and costs of a business at different levels of output. Follow each stage carefully by drawing the chart on the graph paper as you go.
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Mark out the scales on graph paper. The vertical axis will record weekly costs and revenues in £. The scale will extend from zero at the origin to the maximum revenue that can be earned = 600 customers x £10 each = £6,000. Mark out the scale in squares of £1,000.
The horizontal axis records the number of customers (or units of output). This scale will extend from zero at the origin to a maximum capacity of 600. Mark out the scale in squares of 100
STAGE 1
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Draw in the variable cost line. Variable costs per customer were forecast to be £3. Start this line at zero – no customers means no variable costs are used in production. Just one more point is needed to complete the variable cost line. At 600 customers a week, total variable costs will be £1,800 – add this coordinate into the graph and then join the two points with a straight line from zero to £1,800.
STAGE 3
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Draw in the fixed costs line. Weekly fixed costs are £2,800 and – because they don’t vary with the number of customers – this line can be drawn completely horizontal from the point £2,800 on the vertical scale.
STAGE 2
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Add fixed and variable costs together at all levels of output to give the total weekly costs of the businesses. This line STARTS at £2,800 because even with no customers, there will be weekly fixed costs of £2,800. The fixed cost line is then drawn parallel to the variable cost line ending it at 600 customers. To check this – the total costs at 600 customers will be:£2,800 + (600 x £3) = £4,600. Plot this coordinate. This will give you a total costs line parallel to variable costs.
STAGE 4
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Add the revenue line to complete the break-even chart. The restaurant’s revenue will be zero with no customers so this line starts at the origin. The other coordinate needed will be at maximum sales revenue: 600 customers x £10 = £6,000. Draw a straight line between zero and £6,000 (at 600 customers).
STAGE 5
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The level of output at which the firm just breaks even can now be shown by drawing a vertical line down to the horizontal axis from where total cost = total revenue. Any point to the right of this break-even point is profit. This can be calculated by doing Sales Revenue – Total Costs. Any point to the left of the break-even point is where the business makes a loss.
STAGE 6
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STAGE 7From the chart we are able to tell:
The restaurant’s original forecasted break even number of customers is 400.
That up to 400 customers a loss is made by the business (loss making range of output).
After 400 customers a profit is made – for example, at 500 customers the forecasted profit is £700 per week.
The largest profit is, clearly, made at the maximum level of customers (600). There is a profit making range of 200 customers. 600 (max customers) – 400 (break even customers).
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EXTENSION QUESTIONS
What is the profit/loss at 200 customers?
What is the profit/loss at 550 customers?
If the business is achieving 450 customers what is the margin of safety?
How could the business lower it’s break even point?
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BABY CLOTHES MANUFACTURERS
Each table is a group of baby clothes manufacturers.
You must use your data, to work out the break-even point for your business.
Draw your break even point on graph paper.
Analyse your break even chart as follows: Break Even Point Loss Making range of output Margin of safety Where is largest profit made?
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