4.2 Costs, Scale of Production and Break-Even Analysis - Learner
4.2 Costs, Scale of Production and Break-Even Analysis - Learner
4.2 Costs, Scale of Production and Break-Even Analysis - Learner
10 30 30
11 32 33
12 34 36
Breakeven level of output (level of output @ which TC = TR).
Breakeven point Neither Profit nor Loss is made
• Fixed Cost
• Variable Cost per unit(Material and Labour cost)
• Selling price per unit
• Maximum output
• Graphical method
• Different level of output
• Total Cost = Fixed Cost + Variable Cost
• Total Revenue = Selling Price * Output
• Plot graph
• Equation method
• Contribution = Selling Price – Variable cost
• BE level of output = Fixed Cost / Contribution
Graphical Method
• Step 1 – Calculate Total Cost and Sales Revenue @
different level of output
Output 0 20 30
FC
VC
TC
SR
• Step 2 - Plot graph: X axis – Output; Y Axis – Cost and Revenue
• Total Cost – begins @ Fixed cost
• Sales Revenue – starts @ origin
Output 0 5000 10000 15000 25000 30000
FC 200000 Break-even
200000 200000 charts200000 200000
200000
VC 0 175000 350000 525000 875000 1050000
TC 200000 375000 550000 725000 1075000 1250000
SR 0 225000 450000 675000 1125000 1350000
1400000
1350000
1250000
1200000
1125000
1075000
1000000
Cost and Revenue
900000
800000
725000
675000
600000
550000
450000
400000
375000
225000
200000 200000
0 0
0 5000 10000 15000 20000 25000 30000
DRAW BREAK EVEN CHART
• » fixed costs are $5000 per year
• » the variable costs of each pair of shoes are $3
• » each pair of shoes is sold for a price of $8
• » the factory can produce a maximum output of 2000 pairs of shoes per year.
• Now we can plot the information on the graph. Note the following points:
• » The y-axis (the vertical axis) measures money amounts – costs and revenue.
• » The x-axis (the horizontal axis) shows the number of units produced and sold.
• » The total cost line is the addition of variable costs and fixed costs.
• Total Cost – begins @ Fixed cost
• Sales Revenue – starts @ origin
a Draw a break-even chart from the information in the table.
b From your break-even chart identify:
• the break-even level of output
• the level of profit at maximum output
Namib Tyres Ltd produces motorcycle tyres. The following information about the business has been obtained:
• Fixed costs are $30 000 per year.
• Variable costs are $5 per unit.
• Each tyre is sold for $10.
• Maximum output is 10 000 tyres per year
USES OF BREAK EVEN CHART
• expected profit or loss to be made at any level of output.
• impact on profit or loss - redrawing the graph - What would happen to the
break-even point and the maximum output level if the manager decided to
increase the selling price
• show the margin of safety
• PRICING DECISION
• MANGEMENT DECISION
LIMITATIONS OF BREAK EVEN CHART
• assuming that all goods produced by the firm are actually sold
• Fixed costs only remain constant if the scale of production does not change
• many other aspects of the operations of a business
• assumed that costs and revenues can be drawn with straight lines.
Equation Method
• BE level of Output = Fixed Cost / contribution per unit
• Contribution per unit = selling price – Variable Cost
• Calculate Break Even Level of output
• Fixed Cost is $200,000
• Variable Cost is $35
• Selling Price is 45
• 200,000 / 45-35
• 200,000 / 10
• 20,000
A fast-food restaurant sells meals for $6 each. The variable costs of preparing
and serving each meal are $2. The monthly fixed costs of the restaurant
amount to $3600.
a How many meals must be sold each month for the restaurant to break even? Using break even chart and equation
method
b If the restaurant sold 1500 meals in one month, what was the profit made in that month?
c If the cost of the food ingredients rose by $1 per meal, what would be the new breakeven level of production?
Fixed cost / Contribution = 3600 / 4 = 900
Contribution = selling price – variable cost = 6 – 2 = 4