Break Even Analysis
AS Business Studies
Aims and Objectives
Aim:
• Understand contribution
Objectives:
Define contribution and break even
Explain the importance of break even
Analyse contribution and break even figures
Starter
• If a business is breaking even, what does this mean?
Break Even Definition
• When a business is just earning enough sales
revenue to pay its total costs.
• It is not making a profit, nor is it making a loss.
Why is Break Even Important?
• Discuss in your group why knowing the break
even point may be important for businesses and
entrepreneurs.
Why is break even important?
1
• Important for entrepreneur to aim for.
2
• If business can break even early, there is
potential to make early profits.
3
• Banks and lenders will want to know, as the
longer it takes to break even, the greater the risk
4
• Important decision making tool which can be
used by managers to develop strategies
Contribution
• Difference between sales revenue and variable
costs of production.
• It is the surplus made after all variable costs
have been paid for from sales revenue. This
surplus goes towards paying fixed costs.
Contribution Per Unit
• Difference between the selling price of one unit
and the variable cost of producing one unit.
• Selling Price Per Unit £8.99
• Variable Cost Per Unit £4.00
• Contribution Per Unit = £4.99
• Calculate for the five businesses.
Total Contribution
• Contribution Per Unit x
Number of Units Sold or Number of Customers
• Can be used to calculate profit:
• Total Contribution – Fixed Costs
• Calculate Total Contribution and Profit for the
five businesses.
Methods of Increasing Contribution
• How could a business increase its contribution
figures to make a higher potential profit?
Discuss
1) Increase the selling price per unit
2) Reduce variable costs per unit.
Break Even
• Break Even Level of Output: this is the level of
output or the amount of customers that earns
enough revenue to cover total costs.
• No profit and no loss is made.
• Break Even = Fixed Costs of Business
Contribution Per Unit
Break Even
• Calculate for the five businesses.
Finance Questions
• Speed Revise
• Questions 13 minutes
• Peer Assess
• Cash Flow
• Contribution Calculating
• Calculating Profit
What is meant by the term cash flow?
(2 marks)