Today you work out how many foil jobs a week Five Star needs before its sales revenue pays for every cost, fixed and variable.
Twelve sections, about an hour and a quarter all up. One section is one sitting. Do that one and stop.
Three from the lessons so far. Have a go before you open them.
The rent is a fixed cost. The rent stays the same however many foil jobs Five Star does.
The colour is a variable cost. Every foil job uses more colour, so twelve foil jobs cost more than nine.
Every cost: the fixed costs and the variable costs. Leaving out a cost makes the profit look bigger than it is.
Five Star's costs are either fixed or variable.
| Five Star's costs | |
|---|---|
| Fixed costs, one week | $1,560.00 |
| Rent | $600.00 |
| Sanjay's pay40 hours × $24.00 | $960.00 |
| Variable costs, one foil job | $40.00 |
| Colour and products | $28.00 |
| Power | $4.50 |
| Water | $1.50 |
| Laundry | $6.00 |
This lesson is about the foil jobs, so the shampoo shelf is left out.
The fixed costs stay at $1,560.00 however many foil jobs Five Star does. The variable costs grow by $40.00 with every foil job.
Three figures decide Five Star's break-even point.
Break-even is the level of sales where the sales revenue pays for all the fixed and variable costs.
Let's look at how many foil jobs it takes for Five Star to break even. Drag the slider and find out.
Break-even analysis
At 6 foil jobs, the total costs are more than the sales revenue, so the week ends in a loss of $660.00.
The break-even point is the level of sales where the sales revenue equals the total costs. At the break-even point, a business makes neither a profit nor a loss.
At the break-even point, the sales revenue equals the total costs.
At the break-even point, the profit equals the costs.
Five Star's break-even point is 11 foil jobs a week. At 10 foil jobs the week ends in a loss. At 11 foil jobs the sales revenue is more than the total costs, so the week ends in a profit.
Here's how you can work out the break-even point without using the slider above.
The exam writes the same formula like this:
The formula gives 10.4, and nobody does part of a foil job. At 10 foil jobs the week ends in a $60.00 loss, so a break-even point always rounds up.
Five Star does 12 jobs per week, so Five Star is 1 job past the break-even point of 11 jobs per week.Give the break-even point with its unit and its period, such as 11 foil jobs a week. Then compare the break-even point with the number of foil jobs Five Star does each week.
Move a slider to change the price, the variable costs or the fixed costs, and watch the break-even point move.
Break-even analysis
Each slider starts on Five Star's real figure.
The total costs line starts at the fixed costs, because the rent and Sanjay's pay are paid even with no foil jobs. The line then rises by $40.00 of variable costs with every job.
A break-even chart needs a title, both axes named, and the unit on each axis.
A chart titled “Five Star, one week”, with “Foil jobs done in a week” along the bottom and “Dollars in the week” up the side.
Two lines that cross, with nothing named on either axis.
Try each one on the sliders first if you want to.
The break-even point moves up. Rent is a fixed cost, so the fixed costs rise and more jobs are needed to pay for them. The price and the variable cost of a job have not changed.
The break-even point moves down. The colour is a variable cost, so each job costs less. The price less the variable cost grows, and fewer jobs are needed to pay for the same fixed costs.
The break-even point moves down. The price less the variable cost grows, so fewer jobs are needed to pay for the same fixed costs.
The break-even point moves up. Sanjay is paid for all 40 hours the salon is open, whatever gets booked, so his pay is a fixed cost. The fixed costs rise and the break-even point rises with them.
The break-even point does not move. Neither the price nor any cost changed, so the break-even point stays at 11 jobs. What changed is the number of jobs above the break-even point: 3 instead of 1.
The colour wholesaler puts the colour for a full head of foils up from $28.00 to $40.00. As a result, the variable costs of a foil job rise from $40.00 to $52.00.
| Before | After | |
|---|---|---|
| Colour and products | $28.00 | $40.00 |
| Power | $4.50 | $4.50 |
| Water | $1.50 | $1.50 |
| Laundry | $6.00 | $6.00 |
| Variable costs | $40.00 | $52.00 |
Drag the slider and see where Five Star breaks even now.
Break-even analysis
At 11 foil jobs, the total costs are more than the sales revenue, so the week ends in a loss of $42.00.
The break-even point rises from 11 to 12 foil jobs a week. Five Star does 12 jobs per week, so Five Star has no jobs to spare.
A break-even analysis uses a price that has already been set, and shows how many units that price needs. You cannot use a break-even analysis to decide the price.
The price first, then the break-even point“Five Star charges $190.00 for a full head of foils. Five Star decided the price based on what a foil job costs, and left enough money to make a profit. At $190.00, the break-even point is 11 foil jobs a week. Five Star does 12 jobs per week, so Five Star is 1 job past the break-even point.”
The break-even calculation setting the priceMy break-even analysis shows Five Star needs 11 foil jobs a week, so the price should be $190.00.A break-even analysis cannot set a price. The price goes into the break-even analysis, and the analysis shows how many foil jobs that price needs.
The figures in the decision“I have decided to keep a full head of foils at $190.00. The price less the variable costs of $40.00 is $150.00 a job. The fixed costs are $1,560.00 a week, so the break-even point is 11 foil jobs a week, and Five Star does 12 jobs a week.”
No figures in the decisionI built a break-even analysis, and I have decided to keep the price where it is because that is best for the business.The sentence gives no figures. The decision has to use the figures from the break-even analysis.
You may need to work out your own break-even point or, if a break-even analysis is provided to you, take some figures from it.
What each grade asks you to do:
Press each grade to see what it adds.
Five Star does 12 foil jobs a week, so Five Star is 1 job past the break-even point.
Achieved works out the break-even point, with every figure it uses.
The questions this lesson makes people ask, answered simply.
A break-even point rounds up because at 10 foil jobs, one fewer than 11, the week ends in a loss.
| A week of 10 foil jobs | |
|---|---|
| Sales revenue10 jobs × $190.00 | $1,900.00 |
| Total costs$1,560.00 + (10 jobs × $40.00) | $1,960.00 |
| Loss$1,960.00 − $1,900.00 | $60.00 |
Then the week would end in a loss of $360.00. Five Star would have to put the price up, cut a cost or find more clients.
| A week of 8 foil jobs | |
|---|---|
| Sales revenue8 jobs × $190.00 | $1,520.00 |
| Total costs$1,560.00 + (8 jobs × $40.00) | $1,880.00 |
| Loss$1,880.00 − $1,520.00 | $360.00 |
Work out the break-even point for one service at a time. Five Star sells four services:
Each service has its own price and its own variable costs, so each service has its own break-even point. The break-even formula takes the price and the variable costs of one service. The break-even point of 11 foil jobs a week is for the full head of foils.
Each of these sentences loses a mark. Work out what is wrong before you open the answer.
The problem. The sentence names the wrong two things as equal.
At the break-even point the sales revenue and the total costs are equal, and the profit is zero.
The break-even point is reached when the sales revenue equals the total costs.
Name the two things that are equal, and say what the profit is.
The problem. The working leaves out the variable costs. Each job's $40.00 of variable costs has to come off its $190.00 price before the fixed costs are divided.
At 9 foil jobs, the total costs are $1,920.00 and the sales revenue is $1,710.00, so the week still ends in a loss.
Take the variable costs off the price first.
The problem. A break-even analysis cannot set a price. You put a price into the break-even analysis, and the analysis tells you how many sales that price needs.
Say how the price was set before you use the price in a break-even analysis.
Five Star charges $190.00 for a full head of foils. Five Star decided the price based on what a foil job costs, and left enough money to make a profit.
The break-even point is 11 foil jobs a week, and Five Star does 12 foil jobs a week.
Say how the price was set first, then use the price in the break-even analysis.
The problem. The decision uses none of the figures from the break-even analysis.
The sentence that makes the decision has to use the figures from the break-even analysis.
After the colour rise, the variable costs are $52.00 a job. I have decided to cut Sanjay's hours from 40 a week to 36.
The cost falls on Sanjay: $96.00 a week.
Write the figures from the break-even analysis into the decision.
The problem. Sanjay is paid for every hour the salon is open, so his $960.00 a week is a fixed cost. The $36.00 (1.5 hours of a foil job × $24.00) is one job's share of that pay, not a cost the job causes.
Put Sanjay's pay on the job and the break-even point falls by almost half.
Sort every cost first, then work out the break-even point.
The words this lesson introduced, each with an example that is right and one that is not.
A break-even pointFive Star's break-even point is 11 foil jobs a week.
Not a break-even point (but profit mixed up with costs)“The week where profit equals costs.” At the break-even point the profit is $0.00.
Not a break-even analysis (but a guess with no figures)“Five Star has to do a lot of foils to cover its costs.” The sentence has no fixed costs, no variable costs and no number of jobs.
Not the total costs (but the fixed costs alone)$1,560.00, the rent and Sanjay's pay. The variable costs of every job are missing.
These four tasks are about Bright Street, the business that makes the shampoo Five Star sells.
| Bottles sold in the month | 400 |
| Price of one bottle | $13.00 |
| Fixed costs, each month | $3,160.00 |
| Wages | $2,400.00 |
| Rent | $700.00 |
| Interest on the $15,000.00 loan that bought the machines that mix the shampoo | $60.00 |
| Variable costs, each bottle | $3.95 |
| Cost of an empty bottle | $1.20 |
| Cost of the ingredients | $2.75 |
a.
Only the fixed costs are divided, because the variable cost of each bottle is already taken off its price.
b.An empty bottle goes from $1.20 to $1.80.
That is 24 bottles more than the 350 before the bottle cost more.
The fixed costs are untouched, because nothing about the wages, the rent or the interest changed. Only the variable cost moved, from $3.95 to $4.55 a bottle, so the break-even analysis is worked again with that one figure changed.
c.Now write up the break-even analysis, with the figures in What you know. The price first, then the break-even point with its units, then how many bottles Bright Street really sells.
“Bright Street sells its shampoo to salons at $13.00 a bottle, a price built up from what a bottle costs to make plus the profit Bright Street needs. The price less the variable cost of $3.95 is $9.05 a bottle. The fixed costs are $3,160.00 a month, so the break-even point is 350 bottles a month. Bright Street sells 400 bottles a month, so the price covers every cost with 50 bottles to spare.”
The price and the reasoning behind it come first, the break-even comes next with its unit and its period, and the real sales are compared with it at the end. Starting with the break-even leaves the price looking like something the model produced, which is backwards.
d.Bright Street responds to the bottle's higher cost by putting its own price up, from $13.00 to $13.60. Work out the break-even point at the new price.
The $0.60 on the price and the $0.60 on the bottle cancel out, so the break-even point is back to where it was before the bottle cost more.
Go Sierra, go!
You worked out how many foil jobs a week make Five Star's sales revenue equal its total costs, fixed and variable. You reworked the break-even point for the colour rise, and did the same for Bright Street's shampoo. Next come the models that look outside an organisation's own numbers.