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Break-Even Analysis

Joe is a voluntary club administrator and he has the responsibility to organise a sporting event.

This event requires the expenditure of the following amounts:

Venue Hire $400.00
Advertising and Promotion Costs $300.00
Trophies $200.00
Telephone, Postage and Stationery $100.00
Total Fixed Costs $1,000.00

These amounts will be spent no matter how many people turn up to the event, and therefore they are called Fixed Costs.

At event, however, there will be other costs which will be dependant upon the number of people who turn up and participate. These costs are as follows:

Each competitor will receive each
Food and drink $10.00
Hat $5.00
Variable Costs per Competitor $15.00

These costs are referred to as variable costs because the amount of cost will vary with the number of competitors.

Joe is worried about how many competitors he needs to break-even if he charges a competition entry price of $20.00 per participant. He wants to calculate the minimum number of participants he needs so that the event does not lose money.

The term break-even means that all event costs will just be covered by all event income.

This problem is an every-day problem for businesses of all types but fortunately it is not a difficult one.

In solving this type of problem it is necessary to distinguish between fixed and variable costs (as above). This is how Joe calculates the solution:

 
Competition Entry Fee $20.00
less  
Variable Costs per Competitor $15.00
Contribution of each Competitor
towards Fixed Costs
$5.00

Total Fixed Costs $1,000
divided by Contribution $5.00
No of competitors required is 1000/5 = 200

The answer is 200 competitors!

The above a solution is a commonsense way of putting it but if you would like a formula this one is an easy one to remember:

Formula for Break-Even Point
Fixed Costs
Price - Variable Costs
   
Don't forget that (Price - Variable Costs) = Contribution

Copyright Leo Isaac 2002

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