Break Even Analysis
Learning Objectives
In today’s lesson you will earn about:
 Re-cap of cost curves
 What is meant by revenue and how to
calculate it
 What a revenue curve looks like and how
to draw it
 Construction of a break even chart

Costs
Costs
Total costs
Variable costs
Fixed costs
output
Total revenue
The value of the goods or services a
business sells
 Total Revenue = Price (of product) x
quantity (sold)
 Example - if our previous example sells
10 of its product at £4 its revenue from this
sale is;
 Total revenue = 10x £4 = £40

Total revenue and output (Firm X)
Output (iPads)
Total Revenue(£)
0
0
10
40
15
60
20
80
25
30
Exercise
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
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
In our previous example lets assume that the
firm we were looking at sells it’s product at £4
We’ll assume it sells all its output up to 30 units
Ie when it produces 10 units it sells all 10 at £4
so its revenue is £40
Now draw a new table showing costs, output
and revenue
Plot the firm’s revenue curve on a new graph
Revenue Curve
Costs/price
Total revenue
output
Break Even Chart
Now plot all the firms cost curves and
revenue curve on one big graph
 Use on side of A4 to do this
 Use different colours for your lines if
possible
 You should have something that looks like
this:

Break Even Chart
Costs/prices
Profit( margin of safety) Total
revenue
Break even point
Total costs
loss
Fixed costs
output
Break even output
Explanation of Break Even
Chart

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Shows the profit or loss made by the firm at
each level of production
The amount of profit is shown as the distance
between the total revenue and total cost curves
Where total revenue = total cost is the break
even point I.e. neither profit or loss is made
Above the break even point profit is made
Below the break even point losses are made
Exercise
Caroline’s café 2 case study
 Tasks 1,2,3,4

Decision making with break
even
Shows the effects of changes in costs
 Shows the effect of changes in
price/revenue

limitations
Assumes all of the product is sold
 Unexpected changes in costs can render
the chart obsolete

Break Even Formula
Break even =
Fixed Costs
selling price – variable cost/unit
Profit
Profit=Total revenue-total costs
 Economists see profit as the reward to
entrepreneurs for risk taken in organising
the factors of production
 Land-rent, labour-wages, capital-interest,
enterprise-profit

Exercise
Page 360 It Makes You Think Questions a,
b,c,d,e
 Page 365 Heinemann textbook integrated
activity Questions 1- 4

Question 1
Fixed Costs
 Van MOT
 Javeds Salary
 New photocopier
 Andrea’s salary
 Fax machine
 Drivers salary
 Heating
 Lighting
 New office carpet
 Tea bags
Variable Costs
 Petrol
 Blank paper
 Electricity for the press
 Ken’s wages
 Telephone bill
 Printing ink
 Distribution wages
 Stationary
Question 2
Break even = fixed costs/selling price variable cost/unit
 Break even = 100/1.50-1.20 = 333.3
 i.e. 333.3 posters to break even
 Ben has accepted the order for 500
posters because he knows he will make a
profit on every poster after 334 have been
produced

Question 3
Break even = fixed costs/selling price variable cost/unit
 New break even = 130/1.50-1.20 = 433.3
 Yes Ben should still accept the order of
500 posters as he will make a profit on
every poster after 434 have been
produced

Question 4
Break even = fixed costs/selling price variable cost/unit
 (a) BE = 100/1.40-1.20 = 500 posters
 (b) BE = 100/1.30-1.20 = 1000 posters
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Ben should suggest selling price of £1.40
in order to make a profit ( at £1.30 he will
only break even)