costing! unit 6! simulation

LilCharJ

i have my unit 6 simulation in 2wks time. and i just cannot get into my head breakeven-points and marginal %'s. its all 'gobaldi goop' to me :confused1:
pls help xxx

SandyHood

Costs are classified according to their behaviour.
Some costs will stay the same in total even if you make and sell more of a product.
Others stay the same on a unit basis, but the more you make and sell the more you need of them.
If I hired a van and went to a football match to sell chips, every sale will cost me one potato.
But the hire of the van the petrol and any pitch fees would be the same irrespective of how many bags of chips I sell.

My price for a bag of chips is £1.20
I use one large potato per bag of chips this costs me £0.30 each (and I've made an arrangement with my supplier that I can retun any I don't use)

So I make £0.90 each time I sell a bag of chips.
Each bag is contributing £0.90 towards my van hire etc

My van hire, petrol etc costs me £200 per day so I don't make profit even if I sell 200 bags of chips.

Turnover (200 x £1.20) .........£240
Variable cost (200 x £0.30)..... £60
Contribution (200 x £0.90) .....£180
Fixed Cost...........................£200
Loss......................... ..........£20

Now that we can see how the price, the variable cost per bag and the fixed cost are related as far as calculating our profits are concerned we can add another aspect.

The £0.90 is the key to figuring out how many bags we need to sell to not lose any money.
Our fixed cost is £200, so how many £0.90 must we get to pay the £200?

222.22 bags
But we don't sell 2/9ths of a bag, so we muist sell 223 to break even.


Break even points tell you the minimum number of units you must sell to cover your costs.
You calculate them by finding how many lots of the contribution per unit you need to cover the fixed costs.