Page 126 - DMGT304_EVENT_MANAGEMENT

Unit 5: Financial Management

Let us understand the concept by taking an example. If fixed cost is ` 100, price per unit is ` 10, Notes
and variable cost per unit is ` 6, then the break-even quantity is 25 (` 100 ÷ [` 6] = ` 100 ÷ ` 4).

In simple terms, break-even point is the point when a company’s profits equal the amount of
money it has invested in a project. For instance, let us take an example of a company who are
hosting five different events in the space of five days. Let us assume that the company spends
` 100,000 on buying extra chairs, furniture, contracted staff payment, etc. At the end of event
number two, i.e., the second day, the company earns through ticket sales exactly one lack. Thus,
event number two is the break-even point; a point when the company recovered all its costs,
i.e., ` 100,000. While it is useful to know the quantity of sales at which a product will cease to
generate losses, it may be even more useful to know the quantity necessary to generate a desired
level of profit, say D.
TR – TC = DP × Q – (F + V × Q) = D
Then Q = (F + D) ÷ (P – V)

This has the effect of regarding the desired profit as an increase in the fixed costs to be covered
by sales of the product. As the decision-making process often requires profits for payback
period, internal rate of return, or net present value analysis, this form may be more useful than
the basic break-even model.

Hit and trial method can be explained with an example:
A candy floss stall serves 60 to 100 customers per week. The average amount spent per customer
is ` 2.50. Variable costs are estimated at 38% of turnover, while a fixed cost is ` 99 per week,
including the average labour cost per week.

The turnover figure is calculated by multiplying the average spending power by the
number of customers.
The variable costs are calculated by finding 38% of the turnover figure.

The cost of ` 99 remains constant.
No. of Turnover Variable Fixed costs Total cost Net profit Net Loss
customer Costs (+) (–)
60 150 57.00 99 156.00 6
70 175 66.50 99 165.50 9.50
80 200 76.00 99 175.00 25.00
90 225 85.50 99 184.50 40.50
100 250 95.00 99 194.00 56.00

Turnover is found by multiplying the number of customers by average amount spent per
customer (60 x 2.50= 150).
Variable cost = 38% of turnover (38/100 x 150 = 57)

Profit = Turnover – Total Cost

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