Breadk even in practice

Greyhairedstudent

I studied and passed the exams for costings, but I am trying to work something out but in practice it does not.
Please help me and show me where it is going wrong.

I want to work out the break even amount of units that we need to cover. this is my scenario, I work in the service industry and we supply hourly support,

Selling Price is £20.00

One person earns £19176.00 per year including employer cost (NI & Tax) working 5 days 39 hours per week this I call the variable cost. and I think is 9.45 per hour - 19176.00/52/39 = 9.45

Therefore contribution is £20.00 - 9.45 which is £10.55

Overheads/Fixed costs for year are £93500.0O which is then 93500.00/10.55 = 8863 units

When I work it back 8863 x £20.00 = £177260.0

minus £19176.00 variable cost
minus £93500.00 Fixed Costs

I am left with £64584.00 but should breakeven , can someone please let me know where I am being stupid.

THANK YOU

crispy

Hello,

Your difference of £ 64,584 is due to the fact that 1 person can work only 2,028 hours (52 weeks @ 39 hours) in 1 year.

The breakeven point is at 8,863 hours works so therefore:

8,863 - 2,028 = 6,835

£ 64,584 / 6,835 = £ 9.45 (The variable cost)

Hope this is ok? :confused1:

CJW

£
Salary (Incl Tax & Ni) p.a 19,176

Number of days in the year 365
Less: Weekends Sat & Sun x 52 weeks (104)
Less: Statutory holidays (UK) (8)
Actual working days in the year 253

39 hours divided by 5 days = 7.80 working hours per day
7.8 working hours per day x 253 working days 1,973 working hours in the year


Salary divided by working hours in the year
19,176
1,973 9.72 = Labour Cost per hour


£
Sales charge per hour = 20.00
Less cost per hour (9.72)
= Contribution 10.28
Contribution
£ £ per hour Hours
Overhead / fixed cost p.a 93,500 10.28 9,095 Total hours to breakeven

Therefore you need to generate sales of 9,095 x £20.00 per hour = £181,900 in order to breakeven.

Breakeven sales - formula 93,500 = £
1/(9.72/20.00) 181,907 sales to be generated in order to breakeven


Quick Check (small rounding) £ Hours £
Cost per hour 9.72 9,095 88,403
Contribution per hour 10.28 9,095 93,497
Sales charge per hour 20.00 9,095 181,900 sales to be generated in order to breakeven

rounding 7

This is my attempt - looks messy but basically you need to produce £181,000 of sales to breakeven. (In my attempt anyway).

I can email you the spreadsheet so you can play around with it if you let me know.

Chris.

CJW

As mentioned in the other reply - I have assumed only one person, if there are more staff then obviously this would dilute the overheads resulting in a quicker / less hours breakeven.

crispy

Hi,

I think the fixed overhead apportionment must be wrong.

The company would have to at least have 5 employees working flat out just in order to recover their overheads!

SandyHood

Crispy
I agree with you on the 5 staff.

I treated the labour cost as stepped rather than variable, and the £93,500 as fixed over the range

At a contribution of £20 per hour (no variable costs now), 5 staff have a capacity to work 9,865 hrs in a year. They would need to recover 9,469 hrs at £20 per hour to pay for all 5 salaries plus the £93,500.

Greyhairedstudent

Break even problem

Thank you all for your help, i will sit down and work through this.

The staff problem is not as complex as I made it, In reality we have a number of staff working 39 hours a week, and our unit cost is £20.00 per hour of support we supply.

We have lost a number of these hours/units and I am trying to work out the breakeven point (and then the profit bit) so that we can build up the business again, and I could not see my way through it.
Each member of staff that gets 9.45 per hour, of the £20.00 so I though that is what a variable cost is ,as they have this amount for each hour/unit they give in their 39 hour week. (they are like the raw material)
The overheads are high because the cost of the rent of the building etc remains the same.
I have put my salary into the overhead/fixed rate costs and also that of the Manager as she Manages all the staff , that's what it says in the books (Factory Manager) -

Thanks again, any other comments appreciated - Its good to put in to practice what they have taught, or try to any way.

Spring Flower

Hi

What you have done here is right i.e. BEP units 8863

The only mistake i can see here is you have minius £19,176 from sales price, insted of calculating variable cpu multiplying by new BEP units i.e £9.45x 8863 units = £83,755.

therefor,

SP-VC= CONTRI
£177,260 - £83,755 = £93,500

I hope you understand:thumbup:

Greyhairedstudent

Break even

Thanks Spring Flower, that also seems to be the answer: