Variable and Fixed Costs

Joe has taken his plan to the bank hoping to get a loan and overdraft to finance his new business. The bank has asked Joe to consider a best and worse case scenario and in particular, what the ‘breakeven’ is for the new business.

Profit Projections: Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Total
Sales £5,000 £10,000 £10,000 £15,000 £20,000 £20,000 £80,000
Purchases £2,000 £4,000 £4,000 £6,000 £8,000 £8,000 £32,000
Wages & NI £2,200 £2,200 £2,200 £2,200 £2,200 £2,200 £13,200
Expenses £500 £500 £500 £500 £500 £500 £3,000
Stationery £250 £250 £250 £250 £250 £250 £1,500
Telephone £100 £100 £100 £100 £100 £100 £600
Rent £800 £800 £800 £800 £800 £800 £4,800
Depreciation £417 £417 £417 £417 £417 £417 £2,500
Profit/ Loss -£1,267 £1,733 £1,733 £4,733 £7,733 £7,733 £22,400

 

Joe has based his sales on a price of £100 per unit; he buys them in for £40 so makes £60 ‘profit’ on every additional unit he sells.
But to sell more he will probably need an extra person on sales, and if he sells a lot more, then an extra person on packing and delivery, maybe an extra van, or even a bigger premises.

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