Profit and Breakeven Point in Mining PDF

MINE ECONOMICS Profit and Engr. Kristine Georgia Y. Po Profit Profit is the financial gain achieved when the revenue generated from business activities exceeds the total costs and expenses incurred to produce and sell goods or services. Types of Profit: 1. Gross Profit 2. Operati...

MINE ECONOMICS Profit and Engr. Kristine Georgia Y. Po Profit Profit is the financial gain achieved when the revenue generated from business activities exceeds the total costs and expenses incurred to produce and sell goods or services. Types of Profit: 1. Gross Profit 2. Operating Profit 3. Net Profit Types of Profit Gross Profit: Revenue minus the cost of goods sold (COGS). It measures the efficiency of production and basic operations. Operating Profit: Gross profit minus operating expenses (e.g., administrative expenses, salaries). It reflects the core operational profitability. Net Profit: Operating profit minus all other expenses, including interest, taxes, and extraordinary items. It represents the overall profitability after all expenses. Types of Profit Formula: Gross Profit = Revenue - Cost of Goods Sold (COGS) Operating Profit = Gross Profit - Operating Expenses Net Profit = Operating Profit - Interest - Taxes – Miscellaneous Breakeven Point The breakeven point is the level of sales at which total revenues equal total costs, resulting in neither profit nor loss. It indicates the amount of output or sales volume needed to cover all fixed and variable costs. Contribution Margin Ratio The percentage of each sales dollar that contributes to covering fixed costs and generating profit. Contribution Margin Ratio = (Selling Price per Unit - Variable Cost per Unit) ÷ Selling Price per Unit Importance in Mining and Business Decisions 1. Profitability Assessment 2. Investment and Funding 3. Breakeven Analysis 4. Operational Efficiency 5. Strategic Planning Importance of Understanding Cost1. Variations Cost Management and Control 2. Profitability Assessment 3. Project Feasibility 4. Risk Mitigation 5. Decision-Making Breakeven Point in Mining Operations Application in Project Planning Project Feasibility: Breakeven analysis helps assess whether a mining project can cover its costs and start generating profit. It provides a clear target for production and sales volumes. Example: Before starting a new mining project, calculating the breakeven point helps determine if projected ore grades and market prices justify the investment. Application in Project Planning Financial Planning: It assists in creating financial plans and budgets by setting clear goals for production and cost management. Understanding the breakeven point helps in determining the minimum required output. How to Calculate Breakeven Point for a Mining Project Formula: Breakeven Point (in units) = Fixed Costs ÷ (Selling Price per Unit - Variable Cost per Unit) How to Calculate Breakeven Point for a Mining Project Formula: Breakeven Point (in sales dollars) = Fixed Costs ÷ Contribution Margin Ratio How to Calculate Breakeven Point for a Mining Project Formula: Contribution Margin Ratio = (Selling Price per Unit - Variable Cost per Unit) ÷ Selling Price per Unit How to Calculate Breakeven Point for a Mining Project Steps: 1. Determine Fixed Costs: Identify costs that do not vary with production levels (e.g., equipment depreciation, salaries). 2. Calculate Variable Costs: Determine costs that vary with production (e.g., fuel, raw materials). 3. Set Selling Price: Establish the price at which the mined ore or product will be sold. 4. Apply Formula: Plug these values into the breakeven formula to calculate the breakeven point. Example Colin is the managerial accountant in charge of Company A, which sells water bottles. He previously determined that the fixed costs of Company A consist of property taxes, a lease, and executive salaries, which add up to $100,000. The variable cost associated with producing one water bottle is $2 per unit. The water bottle is sold at a premium price of $12. Determine the break-even point of Company A’s premium water bottle. Example Breakeven Point (in units) = Fixed Costs ÷ (Selling Price per Unit - Variable Cost per Unit) Break Even Quantity = $100,000 / ($12 – $2) = 10,000 Therefore, given the fixed costs, variable costs, and selling price of the water bottles,Company A would need to sell 10,000 units of water bottles to break even. Factors Affecting Breakeven Point Ore Grade Higher ore grades can lead to higher revenues per unit of ore, which can lower the breakeven point. Conversely, lower grades increase the breakeven point due to lower revenue per unit. Factors Affecting Breakeven Point Market Conditions: Fluctuations in commodity prices affect revenue and, consequently, the breakeven point. Higher market prices reduce the breakeven point, while lower prices increase it. Factors Affecting Breakeven Point Production Costs: Changes in production costs (e.g., labor, energy, raw materials) directly impact the breakeven point. Increased costs raise the breakeven point, while reduced costs lower it. Profit and Breakeven Point Relationship Profitability Threshold The breakeven point indicates the minimum production level needed to start making a profit. Any production above this level contributes to profit, while production below it results in a loss. Example: If the breakeven point is 500,000 tons of ore, producing 600,000 tons results in profit, whereas 400,000 tons leads to a loss. Profit and Breakeven Point Relationship Margin of Safety The margin of safety is the difference between actual production and the breakeven point. A higher margin of safety means greater financial stability and reduced risk of loss. Example: If actual production is 600,000 tons and the breakeven point is 500,000 tons, the margin of safety is 100,000 tons. Graphical Representation The graphical representation of unit sales and dollar sales needed to break even is referred to as the break-even chart or cost-volume-profit (CVP) graph. Below is the CVP graph of the example above: Breakeven Point: The point where the total cost line intersects with the revenue line represents the breakeven point. At this point, total revenue equals total costs. Profit Zone: The area above the breakeven point where the revenue line exceeds the total cost line. This area indicates where the company is making a profit. Loss Zone: The area below the breakeven point where the total Loss Zone cost line is above the revenue line. This area represents losses incurred when production or sales volume is insufficient to cover costs. Strategies for Improving Profitability Strategies for Improving Profitability Increasing Revenue Diversify products Optimize pricing strategy Increase production volume Strategies for Improving Profitability Reducing Fixed and Variable Costs Cost reduction initiatives Streamline operations Leverage technology Strategies for Improving Profitability Enhancing Operational Efficiency Process improvement Training and development Data-driven decision making Conclusion Profit is the financial gain achieved when revenues exceed costs. Understanding different types of profit (gross, operating, net) is crucial for evaluating financial performance. The breakeven point is the level of production or sales where total revenues equal total costs. It helps determine the minimum output required to avoid losses and guide financial planning. The breakeven point impacts profitability by setting a threshold for achieving profit. Effective cost control and revenue strategies help in managing the breakeven point and improving profit margins. Conclusion Strategies for Improving Profitability: Increasing revenue through product diversification, optimizing pricing, and boosting production. Reducing fixed and variable costs through cost reduction initiatives and technology. Enhancing operational efficiency by improving processes, investing in training, and utilizing data analytics. Conclusion Importance of Monitoring Profit and Breakeven Point in Mining Projects Financial Health Regular monitoring of profit and breakeven points ensures the financial health of mining projects. It helps in identifying potential issues early and making necessary adjustments. Conclusion Importance of Monitoring Profit and Breakeven Point in Mining Projects Informed Decision Making: Continuous tracking allows for informed decision-making regarding production levels, cost management, and investment opportunities. Conclusion Importance of Monitoring Profit and Breakeven Point in Mining Projects Informed Decision Making: Continuous tracking allows for informed decision-making regarding production levels, cost management, and investment opportunities. THANK YOU! Engr. Kristine Georgia Y. Po