- Point at which the costs have the same total as the revenue. No loss or profit bang on £0.
- Revenue = Price x number sold
- B.E.P = Fixed costs / Contribution
- Fixed costs = Rent, bills etc - Variable costs = Materials, overtime etc
- Can be used to =
-Produce costs for the product sold - Helps to work out revenue - Helps to predict target sales to reach B.E.P
- CARD CONTINUES ON BACK
- You can break even quicker by =
reducing overheads ( Fixed costs)
may mean using cheaper less reliable equipment or materials
Lower variable costs (cut staff wages, change providers of gas and electricity)
Staff may go on strike, cutting staff altoghter and replacing with robots is not always cost effective. Time it takes to change prices may change again
Raise the price of the product
May become uncompetitve in the market, customers may not want the product anymore, product substitutes may be chosen ( Competitors win)
Margin of safety
Means producing more than required to reach the break even point to gain a profit.
This can only be performed when it is financially viable ( Enough money to do so)
so if you need 334 t shirts to break even at the price of £6 to make and you sell at £12 and you have enough money to produce 500 you will have :
334 x contribution = 12-6 = 6 334x6 = £2004 (B.E.P)
500 X 6 = £3,000
therefore £3000 - £2004 allows a £996 profit
Be careful this profit can only be made if all the units are sold, this could be affected by trends or just competitors blowing you out of the market.
Profit target + fixed costs/ contribution
This formula allows you to see how many units need to be produced and sold to gain the profits the compnay desire to make.
Say it costs £2000 a year for fixed costs and you wish to gain £3000 this leaves the company with £1000 profit
3000 + 2000 / 6 = 5000 / 6 = 834 units