3.3- Breakeven Analysis | The Equation Method

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En provenance du cours de University of London

International Business Capstone

44 notes

University of London

International Business Capstone

44 notes

Cours 6 sur 6 dans Specialization International Business Essentials

The Capstone project is the culmination of the International Business Essentials specialisation, and brings together knowledge gained in the previous courses and applies this to a real-world scenario. Throughout the Capstone, you’ll be taught new skills, and will use the knowledge you have gained throughout the Specialisation to develop a business plan. This course forms part of a specialisation from the University of London designed to help you develop and build the essential business, academic, and cultural skills necessary to succeed in international business, or in further study. If completed successfully, your certificate from this specialisation can also be used as part of the application process for the University of London Global MBA programme, particularly for early career applicants. If you would like more information about the Global MBA, please visit www.londoninternational.ac.uk/mba This course is endorsed by CMI

À partir de la leçon

Internal Information for Business Planning

This week will investigate the internal information needed for business planning, including costs, break-even analysis, and pricing.

3.1- Classification of Costs4:28

3.2- Cost-Volume-Profit0:44

3.3- Breakeven Analysis | The Equation Method2:37

3.4- Breakeven Analysis | The Contribution Margin Method3:22

3.5- Further Aspects of Pricing11:24

Rencontrer les enseignants

Barry McCarthy
Senior Teaching Fellow
School of Management, UCL

[MUSIC]

Breakeven point is the level of output at which a firm makes zero profit.

In other words, it's where total costs equals total revenue.

There are some assumptions made when using break even analysis,

one of those being that fixed costs remain constant.

The variable costs vary proportionally with volume of output, and

all other factors remain unchanged.

For example, selling prices remain constant.

Methods of efficiency and production, unchanged.

And it is volume which is the sole factor that affects costs.

Let's have a look at breakeven analysis using the equation method.

We know that total revenue and total cost, when they're equal,

that's breakeven point.

Or alternatively,

we can say sales equals variable costs plus fixed costs plus your net profit.

So let's put the equation method into an example.

If we have a unit selling price of 10 pounds, a variable cost of 4 pounds,

and fixed costs of 150,000 pounds per year.

That is for one unit, selling price of 10, a unit variable cost of 4,

and fixed costs of 150,000 per year.

The current output is 40,000 units but can be increased to 50,000 units.

The only reason I mention that, it means there's scope

within the relevant range to increase without those fixed costs increasing.

So the question is,

how many units would need to be produced in order to break even?

Okay, so let's look at the answer to our question.

If we let x represent the number of units of production, and this is common for

management accounting, then the equation will read as the selling price,

£10 times the number of units, or 10x.

The variable cost, 4 pounds times the number of units,

that's 4x, plus 150,000.

Setting profit at 0, because we're looking for break even.

And we can then manipulate that to 6x = 150,000.

And then simply by dividing 150 by 6, x then is 25,000 units.

That means that I would need to sell, or

the business would need to sell 25,000 units to break even.

[MUSIC]

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