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Page 630 figure 5.2 B AND C MUST BE MEMORIZED

Page 630 figure 5.2 B AND C MUST BE MEMORIZED Break – even is the point where total costs equal total revenue for a firm. New and not established businesses will use breaking even as an objective while gaining market share. They need to watch their working capital.

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Page 630 figure 5.2 B AND C MUST BE MEMORIZED

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  1. Page 630 figure 5.2 B AND C MUST BE MEMORIZED • Break – even is the point where total costs equal total revenue for a firm. • New and not established businesses will use breaking even as an objective while gaining market share. They need to watch their working capital. • A major factor to breaking even for a firm is to make sure that all their products are making a contribution to paying for fixed costs • Improve profits/contributions by increase sales revenue through marketing, reduce variable costs by using cheaper suppliers and reduce fixed costs by finding cheaper rent and not spending money on expensive expenses. • Unit concentration = Price – average variable cost

  2. Businesses will obviously want to become profitable at some point. Businesses will use breakeven analysis to see if an idea is worthwhile and to see potential profit A business either has a • Loss • Break-even • Profit • There are three different options to figure out the Breakeven point anything below breakeven is a loss above is profit • Break even quantity is the number of a product that needs to be sold to cover costs • Problem there is a candy bar maker who has fixed costs of 3500 per month. Sells his candy bars for an average of 1 dollar each. Variable costs are .3 cents a bar. What is the break even quantity?

  3. Method 2 • The stupidest method  • P X Q = TFC + TVC • (1 X Q) = 3500+.3Q • .7Q = 3500 • Q = 3500/.7 • Q = 5000

  4. Method three • Best method • Break even = Fixed costs / unit contribution • Unit concentration = (1 - .3) = .7 • Break even = 3500/.7 = 5000

  5. Things to consider when making a break-even chart • Label all lines • Draw the TFC line • TC needs to be drawn starts at the fixed cost line because even if there is no output it still needs to be paid. • Total Revenue line is drawn, labeled and starts at 0 • X axis needs to be labeled and properly set for a time period. Also needs to be used for output by units. • Y axis is costs revenues and profits and is done in money. • Should always have a title

  6. Margin of safety (MOS)is the difference between the Break even quantity (BEQ) and the businesses actual sales • Safety margin = level of demand – Break even quantity • Obviously businesses want this to stay positive. (but it can easily be negative) • Number can be expressed in units or by a percentage of the Break even quantity. • For a percentage = margin of safety (40)/BEQ (45) for 60% Problem: Demand for Business and Management students is 85 in year 08. The break even quantity is 45. or 89%

  7. Break-even analysis and business strategy • The most useful part of break-even analysis is that it can show things in a visual form. Businesses use BEA for • Figuring out the BEQ can be very helpful when used along with market research • Risk is determined. The higher the safety level the more likely a business will try the product • In some cases businesses will have a “make or buy” decision and break-even analysis will help them make the decision. • Special order decisions – sometimes some customers will request things that will cost the business more money. (wanting something done differently) The business can use the breakeven analysis to see how much more they need to charge or if it will be worth their while. • As always it is important to remember that “garbage in leads to garbage out”. Also break-even analysis is only quantitative

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