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 teddy-bear manufacturer turns a profit?

Break-Even Analysis

• 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– MATH TIME!!! (go back to grade 9 or 10 math)– You will graph both the revenue and the costs– Bear Example

COSTS = 3x + 150 000REVENUES = 18x

100 000

200 000

300 000

10 000

# of Units

Dol

lar V

alue

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 orderto make their money back in thefirst 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