Lesson
Investigation: break-even analysis
Your task is to investigate the costs involved in making a product that could be sold at a country market or other market-style location and determine what would be involved in making it a profitable business.
Imagine you are a small business owner who makes niche products to sell at community markets. Your clients will be people from the local area who enjoy buying products that have a more homemade feel.
Your challenge is to come up with a product, determine the costs involved in producing it and complete a break-even analysis to determine what is required, in terms of pricing and production numbers to make it a profitable business venture.
The Task
- Choose a product and assume you will make and sell the product for a full year at four markets per month. Some examples of the type of products to consider are:
- making and selling biscuits using a favourite family recipe
- making a simple item for a house or garden (e.g. a craft item or novelty garden item)
- making a pet product (e.g. a cat scratching pole)
- making a particular kind of gift basket
- Create a list of all of the components needed to make your product (e.g. ingredients or products required for construction such as wood, nails, glue, etc.) and investigate their costs. Use this information to determine the Variable Cost for the product you are selling. If you are making a product in which you will sell a number of the item at a time (e.g. making and selling biscuits in packets of four), the variable cost will need to cover the cost of making the number of items sold in the one product (e.g. one packet of four biscuits).
- Decide on a Selling Price for your product. Predict how many you would need to sell at this price to break-even.
- List the fixed costs that are likely to contribute to the costs of producing your chosen product (e.g. electricity if baking or using power tools, purchase of equipment needed for making the items etc.) and determine a reasonable Fixed Cost for a whole year.
- Determine the number of your product you will need to sell over the year to break even using the figures that you have determined in parts 2 to 4.
- Discuss the reasonableness of the answer that you calculated in part 5. Consider:
- how close your prediction in part 3 was to the calculated break-even number
- the number of your product that you will need to make and sell each week or month
- the assumptions you made when calculating the variable and fixed costs
- limitations of the model that you are using
- Now, considering the variable costs from above, make a prediction about how many of your product you would need to sell to make a profit in each of the following categories. Specify the profit you will make for each category, and how many you think you will need to sell to make that profit. Do not carry out break-even calculations. Describe how you made these predictions. How accurate do you think your predictions are?
a) Between $100 and $500 profit
b) Between $1 000 and $5 000 profit
c) Over $10 000 profit.
- Use calculations to determine the actual number of your product that needs to be sold to make the profits of your choice in each category above. How close were your predictions?
- Next, calculate the profit or loss made when considering changes to the original scenario. For each scenario you investigate, describe the change that you are making in a real-life context. In each of these investigations, the number of your product that you sell will remain the same. Choose the number that you will sell from those you calculated in part 7 a) or b). You should investigate:
- varying the selling price of your product
- finding a cheaper way of making your product (buying items on special or in bulk so that the variable price decreases)
- the cost of one of your variable items increasing
- a combination of two or more of these changes
- Write a summary of your findings, including your mathematical calculations and discuss the viability of making money from selling your product at markets.