wi ssw | TAFE: Lesson 6: Break-even point examples Example 1 Ben’s Bottles pays the sales representative a salary of $1,500 per month plus a commission of $1.20 for every bottle sold. If sales this month were 350, then the sales representative will be paid a commission of $420. This $420 is a variable expense, but the $1500 is a fixed expense, ‘Assuming, no other costs, Ben’s Bottles expenses for the month are: © Variable: 350 bottles x $1.20 = $420. ced: $1,000 rent + $1500 salary ‘© Total expenses: = $2,920. 2,500. Ben’s Bottles’ profit is Revenue $7,000 ~ Expenses $2,920 = Profit $4,080. Ben’s Bottles achieved MORE than the breakeven because they made a PROFIT, So, how many bottles must Ben’s Bottles sell to make neither a profit nor a loss? That is, what is their break-even point? Read through the solution and working out below. Solution ‘At breakeven, R ~ E = 0, or we can also say at breakeven, R= E. For Ben’s Bottles: 52,500 fixed costs + $1.20 x bottles sold. Let's call bottles(x). Expense: Revenue = $20 x bottles sold. Let’s cal bottles(x) $2,500 + $1.20 (x) = $20(x). $2,500 = $18.80(x) (x) = $2,500 + $18.80. (x) = 132.97872 Break-even point = 133 bottles. ‘That is, Ben's Bottles must sell 133 bottles each month to break even. [© NSW TAFE Commisson& | TAFE: This can be expressed in the following formula: Fixed Costs Fike —Varlable Cons = Break Even Point (in units) Fixed cost = $2,500. $20 ~ $1.20 = Contribution margin (the difference between the selling price per unit and the variable cost per unit). $2,500 + $18.80. = 133 bottles. Example 2 A business manufactures and sells a single product at a price of $15 per unit. The variable cost of producing the product and selling it, is $7 per unit. The total fixed costs are $80,000. i, Calculate the break-even point for the business in dollars. ii. Calculate the number of units that would need to be sold to obtain a $50,000 profit. Now, compare your answers and working out to the solution below. Sample solution i SP=$15 VC perunit=$7 FC= $80,000 Fixed costs (FC) Contribution margin (SP -VO) 80,000 ay 80,000 8 = 10,000 units Break-even point in sale dollars = $15 x 10,000 = $150,000. (Alternate, formulas can be used) [© NSW TAFE Commissonssw | TAFE? ii, Calculation to number of units to obtain required $50,000 profit. FC 4Profit (required) nit sal Unit sales CM per unit $80,000 +$50,000 Profit (required) Unit sales 3a My Unit sales = 16,250 units [© NSW TAFE Commisson