- Electricity (£0.60)
- Maintenance (£0.20)
- Consumables (£0.40)
So to calculate my Fixed and Variable Costs, I will have to just simply add up all of my FC and VC.
Fixed Costs = £22,620 + £1,120 + £620 + £4200 = £28,560
Variable Costs = 60p + 20p + 40p = £1.20
Selling Price = £8.00 per session
To put my FC into the break-even table, all I have to do is just keep copying the same figure, which is £28,560 because my FC do not vary with the level of output.
My VC per unit, in this case, per sessions because that is what we are dealing with, I do £1.20 and multiply the number of sessions (Quantity) carried out. Subsequently, my TC will then be calculated by adding up my FC and VC per session (unit).
Multiplying the number of sessions (Quantity) with the price per session, which is £8.00, will give me my Sales Revenue (SR) figure for the ‘Cutting Shop’.
Method 1: By Table On A Spreadsheet Package:
Method 2: By Calculation:
Break-even when using a calculation method can be found by using the Contribution Method.
When using this method, we will need to know:
Fixed Costs = £28,560
Variable Costs per session = £1.20
Selling Price per session = £8.00
Step 1:
Contribution = Selling Price Per Session – Variable Costs. So therefore Contribution = £8.00 - £1.20 = £6.80 Contribution
Step 2:
Next step is to divide Our Fixed Costs (£28,560) by our Contribution, which is £6.80
£28,560/£6.80 = 4200 units or in this case sessions need to be carried out in order for the ‘Cutting Shop’ to Break Even.
Task 2
It is imperative for a company no matter what size it is and what its nature is of, whether it is a small, ‘Mickey Mouse’ sized company such as a Café or for that matter a large one because every business needs to know when it breaks even.
Break-even can be measured in terms of physical sales in the form of numerical data and serves as a fundamental business tool to all businesses.
Break-even will go a long way to achieving any given business’ aims and objectives (sales/profit) because it identifies how many sales have to be made down to the nearest unit before a profit can be realised. It is important to know/calculate the break even point because;
- It helps to show how many units have to be sold over a particular/certain amount of time for Total Costs to equal Sales Revenue
- To show when a profit might be absorbed or gained, and alternatively to show when a loss might be suffered
- To use as a target/objective
- To help spot problems if break even is not being met and to then go onto rectifying the current situation one step further
- To help review the possible action to move towards break-even
- To help analyse the effects of events taking place outside the firm which may affect the chances of break-even taking place
Furthermore it is of the essence or it is vital for finding the break-even point because for a business, break-even is a critical point:
For example, the business needs to know if a product will generate profit, i.e. by selling at above the break-even point. Break-even is then an important tool or part of a Business Plan because a lender will want to know that it can get its money back from the lendee.
Break-even also serves as a method for a business to ask the question ‘what if?’
For e.g. what if rent increases by 10%? Can be answered in part at least by looking at the break-even chart.
The effect on the profitability of the business can be seen, subject to the limitations – i.e. the relationship between sales revenue, variable costs and fixed costs all remain the same at different levels of production which is not true.
A question such as ‘what if’ sales increase by 50%?’ can be answered by examining the effect on the nature of the fixed and variable costs and then re-calculating the BE point.
