Activity Getting even at Pens R Us

Transcription

1 Activity Getting even at Pens R Us As part of Enterprise Activity Week you have decided to open a stall at school break times selling stationery. You have borrowed 200 from your parents which you have agreed to pay back at the end of the school year and three of you have each put in 25 to the project. You have agreed to split the profits (assuming you make any) equally between yourselves. You have called your business Pens R Us. Costs: You have agreed to rent a cupboard from the school for 50 per year. You will also have to pay for cleaners/caretakers for the cupboard which is 5 per week. You have bought 5 display shelves in which to display the stationery for 5 each, a large secure money box in which to keep the takings from your sales, for 10. Initially you are going to buy your stock from Staples Office Supplies and have calculated the following data. TABLE 1 SELLING & COST PRICES Item Cost Sales Selling price Small desk organiser 2.50 each Large desk organiser 4.50 each Lined paper pads 0.75 each Rulers 0.20 each Recycled pencils Reporters pads

2 Average cost per item = Average selling price = 2.10 One of your mate s dads has agreed to collect the stationery order each week from the local Staples store. He will charge you 2 per week for this service. In order to calculate the number of items that you need for Pens R Us to breakeven, there are a series of steps to go through. Remember the break even output is where the business makes neither profit nor a loss, it is therefore when TC = TR. Step 1 Using the information for Pens R Us above, you are now going to draw a break even chart, and then check the number of items that you need to sell to start making a profit, using a break even formula. You will first have to decide which costs are fixed and which are variable. Remember variable costs change with the amount that is being sold if a business sells more of a product and if it needs more of an item, then it is a variable cost, eg stock. If the business doesn t need more of an item as its sales increase, then the cost of the item is a fixed cost. Total variable costs = vc per unit x number produced/sold. Using the average cost of buying the items from Staples, if you buy 50 items, you will have to pay them 50 x 1.40 = 70. If you decided not to buy any stock your variable costs would be 0! Now complete Table 2.

3 TABLE 2 CALCULATING TOTAL COSTS Quantity Sold TOTAL VARIABLE COSTS TOTAL COSTS (FC + VC) Pens R Us Fixed Costs for the week are Add total variable costs to fixed costs and complete table above. Step 2. Selling stationery will bring in revenue that will start to cover some of the costs - but how many pieces of stationery need to be sold before you start to make a profit? From Table 1, you can now work out Total revenue, using average selling price x number sold. For example if Pens R Us sell 50 items each week, the total revenue will be 2.10 x 50 = 105, if the business does not sell any items of stationery then total revenue would be 2.10 x 0 = 0! Now complete table 3.

4 TABLE 3 TOTAL REVENUE Quantity Sold TOTAL REVENUE Step 3 Labelling the graph On a piece of graph paper, draw and label the axis. The horizontal axis shows the number of stationery items sold, you have estimated that the most you would sell in a week would be 100, so your scale should go from 0 to 100. The vertical axis represents both costs and revenues. Since the maximum revenue on the basis of a 100 sales is 2.10 x 100 = 210, the vertical scale goes from 0 to 210. Step 4 Plotting the fixed and total costs lines In step 1 you will have calculated Pens R Us fixed costs these do not change with the level of sales, so if 0 items of stationery are sold, the fixed costs are just the same as if 50 items are sold. The fixed costs line is therefore a horizontal line, parallel to the horizontal axis.

5 In table 2 you have worked out total costs for each level of sales. These total costs can now be plotted onto the graph. You will notice that the total costs line starts the fixed cost line and slopes upwards from left to right. Label this line TC. Step 4 Plotting the sales revenue line Now plot the total sales revenue figures, you calculated in table 3, onto the graph. This line starts at 0 and slopes upwards from left to right. Label this line TR. Step 5 Finding the break even point on your graph The break even point is where the TR lies crosses the TC line. If you follow this line downwards, see graph below, you will be able to see how many items of stationery Pens R Us need to sell to cover all your costs. At this level of sales you are not making a profit or a loss. Step 6 Checking the break even output There is a formula you can use to confirm the break even point, it is Break even sales/output = FIXED COSTS SELLING PRICE VARIABLE COST (per unit) If you need help with any of the Steps above, ask your tutor, use a good Business textbook or look at the Break even graph below.

6 Teachers note: Any good level 2 Business textbook, resources can be used to explain concepts here. We particularly like Business for BTEC First (2 nd Edition) by Caril Carysforth & Mike Neild, published by Heinemann. ISBN Also the tutor2u posters for GCSE Business, include an excellent poster on Break Even Analysis