Homework
• Complete questions 5a and 5b i) and ii) about
the Sony Playstation
• Will be details on
www.fremanbusiness.wordpress.com too
• Due 22nd Nov
The Break Even Song
Verse 1
Here’s a song to help our learning,
About what a business should be earning,
To cover all that is has been spending,
On it our exam grade is depending,
Chorus
So what I’ve been asked to do
Is work out what we need in revenue
To stop us from making a loss
Because when we do it upsets the boss
I’m planning our business
I’m planning our business
Form yourself in to a song writing group of no
more than 3. Each group needs to write another
verse on a topic from the list. Use the fact
sheets to help you.
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•
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The break-even formula
Constructing a break-even graph
Contribution
Margin of Safety
Advantages of break-even
Limitations of break-even
If you finish, let me know. I’ll collate all the verses in to
a song. I also have some exercises for you to do.
Factsheet : Break-even formula
Fixed Costs / Contribution per unit = no of units
required to break-even
Remember that the outcome of the formula
isn’t a monetary amount, it’s the number of
items the business must make and sell to cover
it’s costs
Factsheet: Break-even graph
• Break-even is the
output where total
revenue line crosses
total costs line
• Profit is above this point
• Loss is below this point
Factsheet : contribution
Contribution
per unit to:
1. Fixed
Costs
2. Profit
Sales price
per unit
Variable
Cost Per
unit
• Contribution per unit is
the sales price per unit
minus the variable cost
per unit
• Total contribution is
contribution per unit x
no of units made & sold
Factsheet : Margin of safety
• The difference between
what is currently being
made and what is needed
to break-even
• Current output minus
break-even output
• Positive number good,
negative bad!
• Tells you how much
output can fall by before
you make a loss
Factsheet : Advantages of Break-Even
• Simple tool
• Able to ‘model’ changes, such as increases in
costs or reduction in sales price
• Provides a target/focus for the business owner
& staff
Factsheet : Disadvantages of BreakEven
• It assumes that you sell at the same price
• There is an assumption that you will sell all that
you produce. In reality it is more likely some will
be kept in stock so you won’t earn sales income
but will have incurred the cost of manufacture
• The tool assumes that prices will remain the
same throughout the period you are looking at
• This method is only as good as the quality of the
research used to gather the information