Price, costs
and volume:
a relationship
to overcome
break even.
Presented by
Westpac’s Davidson Institute
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Price, volume, costs
Price
Volume
Breakeven analysis
Costs
Agenda
1
Introduction
2
Classifying costs
3
Break even
4
Improving profitability
Introduction
What makes a business successful?
Goodwill
What causes your customers
to buy your goods/services at a value (price)
that will make you a profit?
Goodwill can include
Quality
Service
People
Knowledge
Reputation
Customer Base
Marketing
Look and feel
Location
Intellectual
Property
Convenience
Consistency
Website
Relationships
Time
Days in the year
Weekends
365
104
Public holidays
10
Annual leave
20
Sick leave
Available days
Admin/Marketing
Days available for customers
-
134
231
24
207
Time
Days available for customers
Average time per customer
Working hours per day
Maximum customer numbers
Customer numbers / week
207
1 hour
8
1,656
35
Classifying costs
Classifying costs
Accountant’s P&L
Breakeven P&L
Sales
Sales
- Cost of Sales
- Variable Costs
= Gross Profit
- Expenses
= Net Profit
Variable costs
Costs are classified by how they behave within a business
Variable Costs
Sales
Variable Costs
Sales cause the cost to happen
Direct Labour
Materials
Direct Freight
Commissions
Royalties
Merchant Fees
Packaging
Classifying costs
Accountant’s P&L
Breakeven P&L
Sales
Sales
- Cost of Sales
- Variable Costs
= Gross Profit
- Expenses
= Net Profit
= Contribution Margin
- Fixed Costs
= Net Profit
Fixed costs
Costs are classified by how they behave within a business
Fixed Costs
Sales
Variable Costs
Regardless of whether a sale was
made, the cost is incurred
Rent
Advertising
Salaries
Insurance
Utilities
Leases
Repairs & Maintenance
Fixed Costs
Classifying costs
Accountant’s P&L
Breakeven P&L
Sales
Sales
- Cost of Sales
- Variable Costs
= Gross Profit
= Contribution Margin
- Expenses
- Fixed Costs
= Net Profit
= Net Profit
Break even
5 steps
Step 1
Classify your costs
Example
Fixed Costs
Variable Costs
• Rent
• Consumables
• Motor vehicle
• Marketing
• Admin
• Bank fees
Fixed Costs $34,580
• Insurance
• Association fees
• Wages
Variable Costs $5,600
5 steps
Step 1
Classify your costs
Step 2
Calculate your average sales price
Total revenue divided by # customers = average sales price
Average sales price
Total revenue divided by #customers = average sales price
# Cust.
Total
Average
sales price
$112,000
÷
1,600
=
$70.00
5 steps
Step 1
Classify your costs
Step 2
Calculate your average sales price
Total revenue divided by # customers = average sales price
Step 3
Calculate your average variable cost
Total variable costs divided by # customers = average variable cost
Average variable cost
Total variable cost divided by # customers = average variable cost
# Cust.
Total
Average
sales price
Average
Variable Cost
$112,000
÷
1,600
=
$70.00
$5,600
÷
1,600
=
$ 3.50
5 steps
Step 1
Classify your costs
Step 2
Calculate your average sales price
Total revenue divided by # customers = average sales price
Step 3
Calculate your average variable cost
Total variable costs divided by # customers = average variable cost
Step 4
Calculate your Contribution Margin
Average sales price – average variable cost = Contribution Margin
Contribution Margin
Average sales price – average variable cost = Contribution Margin
# Cust.
Total
Average
sales price
Average
Variable Cost
Contribution
Margin
$112,000
$5,600
÷
1,600
÷
1,600
=
$70.00
=
$ 3.50
$66.50
5 steps
Step 1
Classify your costs
Step 2
Calculate your average sales price
Total revenue divided by # customers = average sales price
Step 3
Calculate your average variable cost
Total variable costs divided by # customers = average variable cost
Step 4
Calculate your Contribution Margin
Average sales price – average variable cost = Contribution Margin
Step 5
Calculate your breakeven point
Breakeven = Fixed Costs divided by Contribution Margin
Breakeven
Breakeven = Fixed Costs divided by Contribution Margin
Contribution
Margin
Fixed Cost
$34,580
=
÷
$66.50
520 Customers
Cost increase
Breakeven = Fixed Costs divided by Contribution Margin
Contribution
Margin
Fixed Cost
$34,580
÷
$66.50
$35,580
=
520 Customers
535
Profit
# Cust.
# Cust. over B/E
(i.e. less 520)
521
1
$66.50
Actual
1,600
1,080
$71,820
Capacity
1,656
1,136
$75,544
Profit
Improving profitability
Four ways to improve return
1. Utilise Capacity
(Market effectively)
2. Increase Capacity
(Work harder or smarter)
3. Reduce Costs
4. Increase prices
Increase prices
Decrease
Increase
Sales price
$50.00
$70.00
$90.00
Variable cost
$ 3.50
$ 3.50
$ 3.50
Contribution margin
$46.50
$66.50
$86.50
744
520
400
$39,804
$71,820
$103,800
Break Even
Profit / Wage
Agenda
1
Introduction
2
Classifying costs
3
Break even
4
Improving profitability
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