Lesson 1, Topic 1
In Progress

3.4. Break-even point of the tender is determined for own business.

ryanrori January 7, 2021

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Break-even is the point where no profit and no loss is made.  We also need to understand the difference between fixed and variable costs. (Or as some experts prefer to say; direct and indirect costs.)

Fixed costs do not change from month to month; eg: management salaries and wages, rent, instalments on equipment, water, lights and telephone etc.  These costs are normally budgeted for at a specific amount.  These are viewed as fixed costs.  That means even if we sell or produce only one item or provide a service to only one customer, we still have to pay all our fixed costs.

Variable costs change depending on the number of items sold, made or the number of times a service is delivered.  For instance, the total amount tendered for 10 items to resell would be quite different from the total amount tendered for 1000 items.  In other words, the cost varies (increases or decreases) according to the number of items or services tendered for.  These costs can also depend on the production process of the business e.g. raw material or ingredients etc.  If there is no production or items purchased, there are no variable costs.

Total operating cost (TOC)= Fixed cost (FC) + variable cost (VC)

Gross profit (GP)                   =     Tender price Cost price

Gross profit percentage (GP%)        =               GP         x   100%

                                                          Tender Price

Calculating the break-even point

Two formulas are used to calculate Break-even.  Each one is used for a different situation:

Formula 1 :   Break-even in units (items)

                                 Fixed costs___

                             Gross Profit / unit

Formula 2 :   Break-even in Rands (Total tender price)

                               Fixed costs__

                             Gross Profit %

Example of calculating break-even point :

Selloane Radebe wants to submit a tender for 200 boxes of photo copy paper.
(5 x reams, 2 500 pages per box).

She pays R120-00 per box.  Her fixed costs amount to R5 100-00 per month.  If she tenders for the 200 boxes, will she break-even for the tender if she put in a tender price for R150-00 per box?

Gross Profit    =       Tender Price Cost Price

                             =       R150-00    R120-00

                             =       R30-00

Break-even in units

Break-even:   =       Fixed costs

                                      Gross profit

                             =       5 100-00

                                        30-00

                             =       170 boxes

Conclusion:  Selloane Radebe will make a profit on her tender.  The 170 boxes will cover her fixed costs for the month, 30 boxes will be her profit on the tender.

Break-even in Rands (Sales Turnover)

Break-even    =         Fixed Costs__

                                      Gross Profit %

Gross Profit %          =       Gross Profit   x  100%

                                      Tender price

                             =         30-00_   x  100%

                                      150-00

                          =       20%

Break-even             Fixed Costs_

                          Gross Profit %

                          =       5 100-00

                                        20%

                          =       R25 500-00

Total tender price   =       Tender price x Amount of items

                          =       R150-00 x 200

                          =       R30 000-00

Conclusion: Selloane Radebe will make a profit on her tender.  The R30 000-00 will cover the purchase of the 200 boxes and her fixed costs for the month, the R4 500-00 will be her profit on the tender.