Starter: Fixed and Variable costs

Write down 3 fixed and 3 variable costs
you can remember

Also define the term ‘breakeven’
The basics of break-even
There are two types of costs:

Variable costs increase by a step every
time an extra product is sold (eg cost of ice
cream cornets in ice cream shop)

Fixed costs have to be paid even if no
products are sold (eg rent of ice cream
shop)
Examples of variable costs
Variable costs increase with the amount of
production
Raw materials
 Petrol
 Labour (paid by the hour)
 Packaging

Example of Variable Costs
Costs of production
One product costs £1 to produce
£4
£3
£2
£1
1
2
3
Production level
4
Examples of Fixed Costs
Fixed costs remain the same no matter the
production level
Rent
 Business rates (tax on businesses)
 Salary based employee wages
 Insurance

Costs of production
Example of Fixed Costs
£400
£300
£200
£100
1
2
3
4
Production level
Breakeven

The point at which a business neither
makes a profit or a loss

Formula:
Fixed costs
(Selling price per unit minus variable cost per unit)
Why calculate break-even?
Tom can hire an ice-cream van for an afternoon
at a summer fete. The van hire will be £100 and
the cost of cornets, ice cream etc will 50p per
ice cream.
Tom thinks a sensible selling price will be £1.50.
At this price, how many ice-creams must he sell
to cover his costs?
Calculating this will help Tom to decide if the
idea is worthwhile.
Applying the formula
Fixed costs
(Selling price per unit minus variable cost per unit)
Tom:
£100
(£1.50 – 50p)
=
100
Units
Fruit Smoothie Breakeven
Selling price - £1
Fixed Costs
Variable Costs (per cup)
Liquidiser - £15
Fruit– 19p
Milk– 6p
Yoghurt – 13p
Cups – 2p
Electricity – 5p
1. Complete the breakeven table
2. Draw breakeven chart
Correct Answers
Fixed costs = £15
 Variable costs = 45p
 Selling price = £1

No. of units to breakeven = 27 cups
900
800
700
Revenue/Cost
600
500
Fixed Costs
Variable Costs
Margin of safety
Total Cost
400
Sales Revenue
300
200
100
0
0
10
20
No. of Garm ents
30
40