Breakeven
Unit 3
Topic 3.2.3
Aims for today
• To understand what
break even is and
how it can be used to
assist businesses in
their planning
Starter task: Formula recap
Match the formulas
1. Contribution
A. Selling price x Quantity
2. Break Even in units
B. Actual production level –
break even output
3. Margin of safety
C. Total revenue – Total costs
4. Total Revenue
D. Fixed costs/contribution
5. Profit or loss?
E. Selling Price – Variable
costs
What does break even mean?
• Break even is where a firms TOTAL REVENUE is
the same as its TOTAL COSTS
(In other words, money coming in = money going out).
• At the break even point, a firm is neither making a
PROFIT nor A LOSS
Q: Why would it be useful for a toy manufacturing
business to calculate its break even point?
To understand the role & purpose of break
even analysis
Break even
• Break even analysis is useful as a business can
work out what volume of sales it needs to
achieve to cover its costs.
• The key to break even is to work out the
contribution made from the sale of each unit.
• The amount of money from each unit sold
contributes to pay for the fixed and indirect
costs of the business.
Break even formula
Contribution
To understand the role & purpose of break
even analysis
Contribution formula
Contribution = selling price less variable costs per unit
(SP - VC)
• Cans of coke = £1 - 0.25 = 0.75 contribution
• Fixed costs are £6,000
• BE = FC / Contribution
• 6,000 / 0.75 = 8000 Cans need to be sold to break even
A CD factory has the following costs:
• Fixed cost: £10,000
• Variable cost: £2
• Selling price: £7
Q: Calculate the break even point in units and the
break point in revenue.
ANSWER: In units £10,000 / (£7-2) = 2000 units
In revenue: £2,000 x £7 = £14,00
Break even point in units =
Fixed costs / contribution
£10,000 / (£7-2) = 2000 units
Break even point in revenue
Quantity at break even x
Selling price
£2,000 x £7 = £14,00
Calculating the break even point
Step 1.
Identify fixed & variable costs – add them together to get the
TOTAL costs
Step 2.
Calculate the TOTAL REVENUE
To understand the role & purpose of break
even analysis
Task 1: Calculating break even
To understand the role & purpose of break
even analysis
OUTPUT
FC
VC
TC
TR (SP=£4)
Profit
0
2000
0
2000
0
-2000
200
2000
400
2400
800
-1600
400
2000
800
2800
1600
-1200
600
2000
1200
3200
2400
-800
800
2000
1600
3600
3200
-400
1000
2000
2000
4000
4000
0
1200
2000
2400
4400
4800
400
1400
2000
2800
4800
5600
800
1600
2000
3200
5200
6400
1200
1800
2000
3600
5600
7200
1600
2000
2000
4000
6000
8000
2000
To understand the role & purpose of break
even analysis
Task 2: Draw the break even chart
using your data
1.
2.
3.
4.
5.
6.
7.
8.
9.
Label the vertical axis “sales and costs in pounds”.
Label the horizontal axis “sales/production (units)”.
Draw on the BE point
Draw a horizontal line for total fixed costs.
Starting at the Total costs point, draw the total cost line going
through the break even point.
Starting at zero, draw the total revenue line through the break
even.
Where the sales revenue crosses the total costs line is the break
even point.
Read off the units of sales to give the break even level of sales.
The gap between the total costs line and sales revenue line after
the break even point represents the level of profit.
To understand the role & purpose of break
even analysis
The break even chart
To understand the role & purpose of break
even analysis
Margin of safety formula
• The difference between the planned number
of units or actual sales and the number of
units of sales at break even point.
Cans of coke: They can make:
• 10,000 cans potentially – 8,000 actual units at break
even
• = 2,000 Margin of safety
Task 3: Draw the margin of safety
To understand the role & purpose of break
even analysis
Extension task:
Break even worksheet
Complete worksheets:
#3 Break Even Analysis
#4 Break even charts
To understand the role & purpose of break
even analysis
Why must businesses understand its
break even point?
• …because the contribution from every unit sold
above the break-even point adds to profit.
• The break-even point provides a focus for the
business;
• It works out whether the forecast sales will be
enough to produce a profit and;
• Whether or not further investment in the product
is worthwhile.
Limitations of break-even charts?
• Assumes all stock is sold
• Does not take into account possible changes in
costs over the time period
• Does not allow for changes in the selling price.
• Analysis is only as good as the quality of
information.
• Does not allow for changes in market
conditions in the time period – e.g. entry of
new competitor.
Task 4 Hot Dogs
• Helen & Joe operate a hot
dog stand in the town
centre. The stand costs £200
per week to hire. Each hot
dog needs one bread roll at
20p, one sausage at 25p and
sauces at 5p.
• The selling price of each hot
dog is £1
Complete the table
At what quantity do total costs = total revenue? (Break even)
What profit is made when they sell 600 hot dogs?
QUANTITY
100
150
200
250
300
350
400
450
500
550
600
650
FIXED
COSTS
VARIABLE
COSTS
TOTAL
COSTS
TOTAL
REVENUE
PROFIT OR
LOSS?
Complete the table
At what quantity do total costs = total revenue? (Break even)
What profit is made when they sell 600 hot dogs?
QUANTITY
100
150
200
250
300
350
400
450
500
550
600
650
FIXED
COSTS
VARIABLE
COSTS
TOTAL
COSTS
TOTAL
REVENUE
PROFIT OR
LOSS?
Complete the table
At what quantity do total costs = total revenue? (Break even)
What profit is made when they sell 600 hot dogs?
QUANTITY
FIXED
COSTS
VARIABLE
COSTS
TOTAL
COSTS
TOTAL
REVENUE
PROFIT OR
LOSS?
100
200
50
250
100
-150
150
200
75
275
150
-125
200
200
100
300
200
-100
250
200
125
325
250
-75
300
200
150
350
300
-50
350
200
175
375
350
-25
400
200
200
400
400
0
450
200
225
425
450
25
500
200
250
450
500
50
550
200
275
475
550
75
600
200
300
500
600
100
650
200
325
525
650
125
Task 5
1. Draw a Break Even chart for the Hot Dog
business - Ensure your chart is FULLY and CLEARLY labelled
2. Draw on the margin of safety (1)
3. Explain how the Break even analysis will help
Helen and Joe (4)
4. Discuss what strategies Helen and Joe could use
to enable them to reach their break even point
quicker (6)
5. Evaluate which of these strategies would be best
for the business (6)
Plenary 1: Break even drag & drop
•
http://www.businessstudiesonline.co.uk/AppliedGcseBusiness/Activities/Unit3/BreakEven/Br
eakEvenTermsDragDrop/frame.htm
To understand the role & purpose of break
even analysis
Break even drag & drop solution
To understand the role & purpose of break
even analysis
Plenary 2: Break even piggy bank
http://www.quia.com/cz/5773.html?AP_rand=331777296
To understand the role & purpose of break
even analysis
Plenary 3: Formula Recap
Contribution
Selling Price – Variable costs
To understand the role & purpose of break
even analysis
Break Even in units
Fixed costs/contribution
To understand the role & purpose of break
even analysis
Break Even Revenue
Break Even Quantity x
Selling price
To understand the role & purpose of break
even analysis
Margin of safety
Actual production level –
break even output
To understand the role & purpose of break
even analysis
Total Revenue
Selling price x Quantity
To understand the role & purpose of break
even analysis
Total Revenue
Selling price x Quantity
To understand the role & purpose of break
even analysis
Profit or loss?
Total revenue – Total costs
To understand the role & purpose of break
even analysis