mm-hmm all right hello everyone how's it going welcome back to another video uh today we're going to be talking about chapter 3.3 of business management which is the break even analysis uh for this for this explanation specifically I figure that the best example would be a visual one um unfortunately not in my school at the moment so I didn't have access to whiteboard so I figured screen recording is not the best thing um anyways that's what we'll be doing today this chapter really is just focused on the break even analysis um so all the focus there however before we get into that there's two formulas you do have to know that are also part of this chapter that are relevant pieces of information and also just good to know them for the exams um so these are these are the issue of contribution so contribution uh what is that that's basically saying total revenue once you take away the variable cost so the pure money you're making off of the sale of a product but it doesn't take into account any other expenses all right it's just the revenue of the product so let's say we sold a hamburger the hamburger cost one dollar for the other person to buy and for us it cost us five cents to make it well then our total contribution from that hamburger is going to be 95 cents um because you know that's that's the amount of money that we're making directly off of that Hamburg that's the money that's coming in taking away what we had to spend that's the money that hamburger brought us but now we got to subtract all the other costs you know the rent of the restaurant the franchise fee the you know all the other stuff um so total contribution that refers to as a mass well let's say we sold a thousand hamburgers we made 95 cents on each of them was 950 dollars that's the total contribution then the contribution per unit is talking per hamburger how much money did we make and it's the same formulas these are both formulas for it but they're quite they're quite simple um anyway so with that um that brings us to this the graph you guys have in front of you which is the break even analysis say hi um it looks complicated but it it isn't it is not very difficult I don't think uh the problem with this graphic and I was looking online for a lot of different graphics and I couldn't find one that like represented all the different points on a break-even analysis that I needed it to so I'm gonna have to get a bit creative and just show you guys with my cursor here or some stuff is but this has all the basics that you really need um so this is this right here is a very basic Break Even chart so what or break even analysis so what is this a break-even analysis is analyzing with a with a specific product up to which point you need to get uh so that a firm will be profitable okay or so that'll at least make back the money that it's spending because so we all know that firms have two types of costs as we talked about in the last chapter they have fixed costs and variable costs fixed costs are always going to be the same because there's things you have to pay just to have the firm for instance you're gonna have to pay rent you're gonna have to pay salaries you're gonna have to pay those kind of things health benefits you're gonna have to pay those no matter what so before you've even sold a single unit of your product you're gonna have spent a good amount of money and then with each product you're selling you're gonna have to spend a bit of money to make each unit of the product so this is basically saying we'll take into account all the costs that we're going to have just built up on the front end how many units do we have to sell so that it you know compensates those fixed costs and the small variable costs so that or at least make it our money back Break Even points or break even is really what you're trying to get to so that your firms at least making money so what you see here in the middle this little dot this is what's known as The Break Even point this is a very important point we're going to come back to it um so what is this graph showing well so this Orange Line you see right here these are costs the reason why I like because these are this isn't just an axis of a chart here this is the axis of a chart the reason why this doesn't start at zero is because this point right here is where our fixed costs are so no matter what that's why you see this little bracket here this is Frick this is fixed cost so up to this point these are your fixed costs this is your rent these are your salaries these are your whatever you're starting at this point no matter how many units you sell because now you can see the bottom axis this is how much you're selling okay so this is at zero units you're already spending this much money um and then as you sell more units well obviously variable costs go up so this line starts to gradually move in the upward Direction because you are spending you're still you're spending money so it's going to keep going up then we get into and you see here this bracket saying variable cost so everything above this line is all variable costs that are getting added on to the fixed cost so you're always gonna have these fixed costs and as you sold as you sell more units your costs are going to be going up however you'll notice this blue line is going up a lot quicker that's because the blue line is representing um the amount of Revenue that you're making the amount that you're that you're gaining from this and so as you can see it starts at zero if you sell zero units you make zero dollars it's not really a way to get around that so this but this starts going up as you're selling more you're making more money and of course this here is assuming that you're selling your product at more than you're making it for you're selling it for some type of profit so you're making money you're making money you're making money and eventually you get to the point where the amount of Revenue that you've made off of this product overcompensates your costs this is talking your your variable costs and your fixed costs you get to this point your break-even point this is let's say you've paid a hundred dollars in rent and you're paying you know Point you're paying five cents for every hamburger well how many hamburgers do you need to sell so that you get past that point where you're making more than the money that you're having to spend so you're making more than those first hundred dollars plus the the 0.5 uh or the five cents that you're spending to produce each hamburger because you know the the variable costs they crawl up but they crawl up slowly the idea is you're you you have a good margin right in an ideal firm you have you have a good margin so you're making more money that's going more and more kind of beyond that so that's really the basics of this is so below this point whatever units you sell let's say I don't know this represents uh 50 hamburgers well here I'm losing money because my variable costs have gone up enough and also with my fixed cost I'm not making anything so if you're in this Zone and actually like anything anything under here this means you're losing money anything under this line in this zone of the chart this means you're losing money once you get to this point this is finally when you've sold enough units that the profit is outweighing the amount of money you're spending so this is when you're starting to make money you're perfectly at this point this means you're making zero dollars you're making exactly what you need to keep the business afloat no more no less um this means you're making profit and now this is where we get into where this chart is lacking because this chart I you see I've described everything that's on there um however there are still a few aspects that we need to take into account so what we have here this is known as a break even point this is also the break even quantity because this is the number of units sold just imagine there's like a line here driving you know drawn down to the unit sold section so this is how many units you would have to sell to get to that break-even point so just along this axis of this was numbered here this tells you how many you need to do this so in most cases you're not gonna have to like calculate this information most likely what will come in an exam is they say hey make a break-even analysis chart for this company and they're going to give you all these figures for the most part um so you're just gonna have to know where do I put everything to make this chart correct uh so you guys already know like your fixed costs with they say it's you know whatever fifty thousand dollars you're gonna put this here say 50 000 and then start you know drawing up and all this is going to be approximate in very few cases in an example are they going to be like hey you need to be exact all this information has to be exactly correct anyway so this is the break even analysis Point all right and this is uh here the amount of Revenue that you're making at that Breakeven analysis point or that this break-even point sorry so you're also going to have a line here this is the amount of Revenue you're making at that point um and then so that's kind of the basic part and then you get to what is known as the margin of safety so this is your sales volume minus your Breakeven quantity this is to say let's say this quantity right here is is a hundred and you've sold 150 units well then so all this area right here this is known as your margin of safety because this is how many units you've sold beyond the break-even quantity how many units you have beyond what you needed to have sold just to make your money back um so this is expressed as a percentage of your demand in this case it would be 150 percent or maybe I guess 50 I don't know if which one you're supposed to use I as just fifty percent so you sold 50 more than you needed to sell uh so that you could make that money back um so that's this part is like this is like your margin of safety of like once you're beyond this point how how safe are you if you only sold one one unit beyond the the Breakeven quantity then your margin of safety is very very small but if you sold let's say 200 and you only had to sell 100 well then you have a very large margin of safety because you sold far beyond what you had to sell this also is used to evaluate the risk of degree for a product because if you look at a product and see it's barely beyond the the margin of safety that means you really have to work hard to maintain your Market because if you lose anything you're not going to be able to make your money back but if you have one that's you know far beyond that break-even quantity that has a very large margin of safety that means it's quite a safe product uh then you have the target profit um so this is more how this can be used as a tool in the case of a business of say you you you know you say this is the break-even point say you say all right with this hamburger business I want to make ten thousand dollars okay well then you can look at in what part of this graphic is the profit ten thousand dollars so one point so because you can see like as we're gonna hear wardis or one dollar or two dollars above you know so you just keep going until you get to the point all right where is where does this line get to ten thousand um or where is it ten thousand Above This sorry that's the important part because these are your costs so at what point is this ten thousand greater than this so once you find that point let's say it's here well then you line it up and you say all right this is the quantity that of units I'm gonna have to sell to make ten thousand dollars in profit so that's a Target profit that's how you can use this as a tool is basically say all right at what point is this whatever I'm out higher than this and then that that's how you know that's how you can kind of calculate this because let's say all right we wait until this gets to ten thousand or sorry twenty thousand and this is ten thousand all right then we have ten thousand in profit that's what we want all right we need to sell that many units and so you can Target your business strategy around those things um however this depends on a lot of different factors because as you guys can see this is a very one-dimensional type of graph uh it depends on your risk your your pricing level of demand obviously if there's not demand for the product none of this matters um also pricing strategy and pricing elasticity because imagine let's say right now you have your hamburger that you know you're making for five cents and selling for a dollar okay fantastic but then all of a sudden let's say you know there there's a new uh competitor in town and now you have to lower your prices to 50 cents per hamburger well now you've just cut your profit margin on each hamburger in half um which means you know all the calculations you change so this calculation is depending on all right we're gonna make this amount of money but if that changes then we're gonna have to see all right how does that affect those also you have to take into account how would changing uh the price of a strategy because what price elasticity is is if I change the price how will the man respond will it respond a lot or respond very little because that also impacts because let's say we lower the profit margin but if the units so they're going to go way up because the demand is going to increase once we lower this price however amount well then that's a worthwhile thing because you could say well in that case even though I'm making less money per unit I'm still going to make a larger profit because I'm going to sell a lot more units so that's working with more projections okay um anyway so Break Even points as we've said this is when your total costs and your total revenues are the same your fixed cost and variable costs are the exact same as the amount of money you're making um and the Breakeven quantity that's how much you need uh to get there so um and anyway so that's that's really the majority of this chart um really the highest or the most complicated point that we get to is up here so let's say at the end of the chart this is when you're at your uh your max profit at your full capacity this is when you're at your full capacity of unit sold typically all right your max output if you're not told anything in an exam you should just say it's double whatever the Breakeven point is so that's why you say this is about halfway through the graph here this point because once you get to here this should be roughly double unless they tell you otherwise the maximum output of a company is two times its break-even point a break-even quantity sorry and then this is the amount of profit you'll make at that maximum um so this is in theory the ideal point of a company is that it's making its Max profit at its Max output um so that's kind of that's this like end part of the charts like this part is kind of your max output Max profit you're going to be making and that's the final part of of this chart and then usually yeah you'd have like a line drawn down here to this part saying like all right this is your max output this is your break even uh output things like that um anyway and with that so that brings us the end of the explanation um I hope everything's been understandable if you guys have any questions do leave comments below um it would be nicer if I had a more complete graph the thing is I actually have in my notes I don't know if you guys will be able to see it very well but I have in my notes a more complete graph but unfortunately since I record all these on my webcam I did not have the ability to uh show my my page my notebook because I can't angle this thing down so because if I did I would have just showed you guys that um but things as they are so I hope you guys have enjoyed this video um the last part is just kind of an analysis of what is this break-even analysis good for um really what it's good for well it it's good for analyzing single product firms that's to say a company that produces one product if you have a hamburger restaurant it's a restaurant that only sells hamburgers it's great for that the problem is this doesn't take into account multiple products because you can see here this is really focusing on the output and the revenue of one product it's really hard to use this if you have more than one product that you're selling also this assumes that your fixed costs are paid regardless of your output which is like normally logical assumption but you have to remember part of your fixed costs are your salaries and if your hamburger restaurant selling 10 hamburgers you're going to have fewer employees than hamburger restaurants selling a thousand hamburgers naturally because you need more people to have a higher output so your fixed costs actually will increase a bit with higher output because you're going to need more Personnel maybe you need a larger location so you're going to have higher rent so the fixed costs aren't really as uniform as the name implies they can change with output so this this saying that all right fixed costs are always going to be here well actually no this could start going up a bit more because let's say once you're at this maximum output you need a building that's twice as large and you need twice as many employees obviously not everything scales up the same way but you're gonna need more so the fixed costs can increase this also doesn't factor in any any type of pricing strategies because let's say maybe once you're selling a higher input then you lower your profit margin you sell it for less money um doesn't take into account bulk orders because let's say if I'm ordering I gave this example earlier in a previous video I think but if you order a thousand hamburgers versus 100 hamburgers from your supplier you might get a discount on those thousand hamburgers because it's a larger amount in that case your variable costs go down because now maybe instead of paying five cents per hamburger you're paying three cents per hamburger well then that also changes these calculations and this this is a very linear graph it's just thinking that your variable costs are increasing in this nice straight line and your fixed costs are staying the same in it that's not really the case um also doesn't take into account economies of scale that's to say that once you have a larger output your variable costs tend to decrease it is your overall cost relative to the number of units that you're producing tend to decrease um so really again this doesn't take into account this because it assumes your variable costs are going to increase you know you're going to be you're gonna spend five cents for the first hamburger and five cents for the thousandth hamburger and there's no there's nothing in Middle happening that's more complicated and it's really not again it's not that simple um there's going to be a lot of different factors however in most exams knowing this simple part is is enough and actually there might be a question where they ask you hey what are the limitations of a break-even analysis and in that case good to know uh so that you can answer those so that's the problem is this graph is just very two-dimensional it doesn't take you to account all of the factors you know holistically of a business that that could need to take into account um but that said that's all for the break-in analysis I hope you guys have enjoyed this video I hope it has been all as understandable as possible make sure to leave a comment if you guys need more information and that is all thank you for watching and a lot of luck with your studies see you later