1. LEARNING AIM B: Understand how businesses plan for success

2. Topic B.1: Understand the planning tools businesses use to predict when they will start making a profit

3. The basics of break-even analysis 1 Businesses must make a profit to survive To make a profit, income must be higher than expenditure (or costs) Income£50,000 Costs £40,000 Profit £10,000 Income£50,000 Costs £60,000 Loss £10,000

4. The basics of break-even analysis 2 There are two types of costs: Variable costs increase by a step every time extra products are 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)

5. The break-even point Variable + fixed costs = total costs When total costs = sales revenue, this is called the break- even point, eg: – total costs = £5,000 – total sales revenue = £5,000 At this point the business isn’t making a profit or a loss – it is simply breaking even.

6. 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 be 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.

7. Drawing a break-even chart 1

8. Drawing a break-even chart 2

9. Drawing a break-even chart 3

10. Drawing a break-even chart 4

11. Identifying the break-even point Loss Profit Break-even point

12. Using a formula to calculate the break-even point The break-even point = Fixed costs (Selling price per unit - variable cost per unit)

13. Applying the formula Fixed costs (Selling price per unit - variable cost per unit) Tom: £100 (£1.50 – 50p) =100

14. Fixed Costs Sale Price Variable Cost Per item Breakeven IN UNITS Q1£10£0.50£0.1025.00 Q2£4,000£400£20020.00 Q3£3 £23.00 Q4£10,000£30£5400.00 Q5£30,000£55£8638.30 Q6£900£1,000£6002.25 Q7£50,000£120£20500.00 Q8£13,000£0.45£0.1037,142.86 Q9£100,000£30£105,000.00 Q10£60,000£45£51,500.00 Q11£60£1£0.3085.71

15. Fixed Costs Sale Price Variable Cost Per item Breakeven IN UNITS Q1£10£0.50£0.1025 Q2£4,000£400£20020 Q3£3 £23 Q4£10,000£30£5400 Q5£30,000£55£8638 Q6£900£1,000£6002 Q7£50,000£120£20500 Q8£13,000£0.45£0.1037,142.86 Q9£100,000£30£105,000 Q10£60,000£45£51,500 Q11£60£1£0.3085.71

16. Margin of Safety This is the difference between the break-even point and the current level of output. If we produce 100 cakes the margin of safety would be: Production – Breakeven = Margin of safety 100 – 25 = 75

17. Total Costs/ Revenue £ Quantity Total Revenue The Margin of Safety? Total Costs Loss Profit Breakeven Point 50 Units 100 Units 150 Units Margin of Safety 150 – 100 = 50