Reading the Break-Even Point

Transcription

1 Using s Lesson Objective To be able to read information from a break-even chart To be able to show changes to costs or revenues on a break-even chart In the last lesson you learnt how to draw a break-even chart. If you labelled it correctly, you will know where the break-even occurs and you will have shown the areas of profit or loss. However, how do you know how much profit or loss the business will make at any given number of units sold? The answer is that the chart will tell you! Reading the Break-Even Point We saw in the last lesson that if you draw a vertical line through the break-even, you can read off the number of units on the x-axis. This tells us how many units the business needs to sell in order to break even in the case below, this is 1 units. 2,5 2, 1,5 1, 5 Loss Break-even Profit Total cost 5 1 Units Produced 15 and Sold 2 Actual sales Reading the Margin of Safety If the business has a break-even of 1 units but actually sells 15 units, it has a margin of safety of 5 units. This is like a safety net it is covering the costs with a bit over (making a profit on these units). Actual Sales Break-Even Output = Margin of Safety Reading the Fixed Costs We know that the fixed costs line goes across horizontally. Where it crosses the y-axis, this is the amount of the fixed costs. In the above chart the fixed costs are 4. Reading Total Revenues or Total Costs Reading margin of safety

2 If we wish to know the total costs, or the total revenues, for a particular number of units, we would draw a line upwards from the number of units. Where it crosses the total costs line, we would draw a line across to the y-axis to read off what the total costs were. We would do the same for the total revenues. In the previous diagram, if we drew a line up from 2 units, we could read off the total costs as 1,6 and the total revenues as 2,. Finding the Profit or Loss The business may well want to know how much profit, or loss, it will make if it sells a certain number of units. To find this out, we read the total costs line and the total revenues line as stated above. We then use these figures to work out the profit or loss figure. Total Revenues Total Costs = Profit (or loss if it is a minus figure) Example 1 The business wants to know how much profit or loss it will make if it sells 2 units. It draws the line upwards from 2 on the x-axis. It then reads off, on the y-axis, where the line crosses the total revenue and the total costs line. In the example below this shows: = 2,1 Total costs = 1,5 We know that Profit = Total Revenue Total Costs, so our profit is: 2,1 1,5 = 6 Profit 2,5 2, 1,5 1, 5 Total cost Units Produced and 2 Sold

3 Example 2 The business wants to know how much profit or loss it will make if it sells 5 units. We repeat the above steps, drawing the line upwards from the 5 on the x-axis and reading the total costs and revenues from the y-axis. You can see this below. This time the line goes through the area we would have labelled a loss. The total revenues are 5 and the total costs are 7. Total Revenues Total Costs = Profit (or loss if it is a minus figure) 5 7 = 2 loss (because it is a negative figure) Total costs 7 1, Units Produced and 2 Sold Total cost Activity 21 1 Draw a break-even chart using the following information: Selling price per unit is 5 Variable costs per unit are 3 are 1, Fully label your chart and shade the loss area in red and the profit area in blue. 2 Now use your break-even chart to read off the profit or loss if the firm sells the following: a. 7 units b. 3 units c. 8 units d. 1 units

4 Showing Changes to on a We saw some time ago that changes to costs or revenues will affect the break-even. We can show such changes by drawing new lines onto the chart itself. If fixed costs increase Here we would need to show the new fixed costs line and recalculate the total costs drawing a new line for this too. See how the break-even has moved: 2,5 2, 1,5 1, 5 Original breakeven New break-even Original total costs Original fixed costs New total costs New fixed costs Units Produced and 2 Sold If variable costs increase If only the variable costs increased, the fixed costs and the total revenues would remain the same. We would simply draw a new total costs line: 2,5 2, 1,5 1, 5 Original breakeven New break-even Original total costs Original fixed costs New total costs Units Produced and 2 Sold

5 Note again how the break-even has moved up. If the selling price is increased This time the costs do not alter, but a new total revenue line is needed: New total revenue 2,5 2, 1,5 1, 5 New breakeven Original break-even Original total revenue Total costs Units Produced and 2 Sold Notice that this time the break-even has moved to the left as the number needed to break even has reduced. Activity 22 In the last lesson, for Activities 13 18, you drew a break-even chart using the table below. Find this now or draw a new one from this table (ignore the last column for now). Quantity Variable costs Total costs Sales revenue at , 1, 2 4 1,2 1,6 2, Sales revenue at 15 Now complete the last column remember it is the quantity 15 (as the selling price has increased to this amount). Draw the new sales revenue line on your chart and show the new breakeven.

6 ? Recap Questions Use the chart below to answer the following questions: 1. Shade the profit area in blue and the loss area in red. 2 marks 2. State what the fixed costs are. 1 mark 3. Label the break-even. 1 mark 4. Read off the total costs at 8 units. 1 mark 5. Read off the total revenues at 8 units. 1 mark 6. State what the profit or loss is at 8 units. 1 mark 7. What new line would you need to draw to show a change in the selling price? 1 mark 8. What new lines would you need to draw to show a change in the fixed costs? 2 marks 5, 4, 3, 2, Total costs 1, , 1,2 Units Produced and Sold