AAT spotlight PQ
How much lolly? Our AAT guru Teresa Clarke walks you through a breakeven point and target profit calculation
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et’s put formulas aside for a few minutes and try to understand the calculations instead. My students love this, as it helps them to understand breakeven point, rather than just trying to memorise how to calculate it. I sell ice creams at £5 each. The cost to make one ice-cream, including the cone, the ice-cream and my time is £2. This means that I make £3 on every ice cream I sell. This is called contribution. I rent my ice cream van at £100 a day. This is my fixed cost. How many ice-creams will I need to sell to cover my rent? I am making £3 on every ice-cream I sell, so I need to work out how many I need to sell to cover that rent. £100 of rent divided by £3 = 33.33333. We round this up as I can’t make and sell part of an ice-cream. So I will need to sell 34 ice-creams to ensure that I cover the rent. This is the breakeven point. 34 ice-creams sold at £5 each will mean I need to take £170 through my cash register each day. This is the breakeven point in revenue. I would like to make £80 a day for myself, my
PQ Magazine July 2022
target profit. So how many ice-creams will I need to sell to cover the rent of my ice-cream van and my target profit? £100 rent for the van plus £80 profit. I want to cover £180, so how many ice-creams will I need to sell when I make £3 on every ice-cream I sell? £180 divided by £3 = 60 ice-creams. This is the number of units, or ice-creams I need to sell to reach my target profit. If my plan is to sell 100 ice-creams a day, this is 66 ice-creams above the breakeven point. This is my margin of safety. The difference between the breakeven point and my planned sales. We can use ice-creams to tackle a more complex question: A company sells units at £60 each. They are planning to sell 4,000 units next month. The direct labour for each unit is £12 and the direct materials are £16. The company’s fixed costs for the period are £75,000. What is the breakeven point in units? Ok, let’s look for ice-creams in this question. The selling price of the unit or ice-cream is £60. The variable costs for each unit or ice-cream are the direct labour and direct materials of £16
and £12 respectively, so the total variable cost if £28. The amount the company make on each unit or ice-cream is £32. This is the contribution. The fixed costs or rent of the ice-cream van is £75,000. This is the fixed cost. How many units must I sell to cover the fixed costs or rent of the ice-cream van when I make £32 on each unit I sell? £75,000 divided by £32 = 2,343.75, so 2,344 units. This is the breakeven point. 2,344 units sold at £60 each will mean I take £140,640 through my cash register. This is my breakeven point in revenue. The company are planning to sell 4,000 units, so this means that they are planning to sell 1,656 units more than the breakeven point. This is the margin of safety. Try a question yourself now using my ice creams method. I am confident it will help. If you like my style of teaching, you may like my workbooks. These are available on Amazon in paperback and as e-Books at very reasonable prices. You can use this link to find them – https://www.teresaclarke.co.uk/books/ • Teresa Clarke FMAAT
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