1. 223 Break-Even AS Edexcel New Specification 2015 Business
By Mrs Hilton for

2. Lesson Objectives To be able to discuss contribution
To be able to calculate a break-even point
To be able to use contribution to calculate break-even point
To be able to calculate the margin of safety
To be able to interpret a break-even chart
To be able to discuss the limitations of break-even
To be able to answer sample exam questions based on the topic area

3. From the specification
a) Contribution: selling price – variable cost per unit
b) Break-even point:
total fixed costs + total variable costs = total revenue
c) Using contribution to calculate the break-even point
d) Margin of safety
e) Interpretation of break-even charts
f) Limitations of break-even analysis

4. Guidance from Edexcel

5. Starter
If you had 100 Christmas trees to sell and each one cost you £2.00 to buy, you decide to sell them at £5. Which tree will be the first one that is pure profit when sold?
100 trees x £2 each = initial investment of £200
You start selling at £5 each and have to sell 40 trees to recoup your investment
Your 41st tree will be the tree that makes a profit

6. Get yer calculators out!

7. Using contribution to calculate the break-even point

8. Definition of Break-even
The point at which revenue equals cost so your business is making neither a profit nor a loss
B/ E is TR+TC
Where B/ E is break-even, TR is total revenue, and TC is total costs, which is fixed and variable costs added together
Note: break-even is expressed as an amount of output NOT a money value

9. Break-even calculations
First we need to know the contribution that selling the item makes towards the profit.
We calculate contribution;
C= SP – VC
Where SP is selling price per item and VC is variable cost per item

10. Contribution: selling price – variable cost per unit

11. Contribution calculation practise
You sell cricket bats for £25, they cost £14 to make
You sell sea shells down on the sea shore for £10 a bag and they cost £3 to put together
You sell red and yellow lorries for £5 each in your shop and they cost £1 to import from China
1) C= C=£11
2) C = C=£7
3) C = C= £4

12. Break-even point

13. Full break-even formula
Break even point can be found when: FC
____ C
Where FC is fixed costs of a business (rent etc)
Where C is contribution (SP-VC)

14. Break-even calculation practise
Lucy sets up a business to print T-shirts. The fixed costs of premises and the T-shirt printers are £3000. The variable costs per T-shirt (the T-shirt, ink, wages) are £5. Each printed T-shirt sells for £25.
How many t-shirts does Lucy need to sell to break-even?
Price Per Unit – Variable Cost Per Unit = Contribution (Towards Fixed Costs).
£25 - £5 = £20 (Contribution Towards Fixed Costs)
Fixed Costs / Contribution = Break-even Point.
£3000 / 20 = 150
150 T-shirts will need to be sold in order to break-even and cover all her costs.

15. Interpretation of break-even charts

16. Break-even diagram Loss Total Revenue Total Costs Profit Quantity
Total Costs/ Revenue
Quantity
Total Revenue
Total Costs
Loss
Profit
Breakeven Point
50 Units
100 Units
150 Units

17. Break-even diagram with margin of safety
Total Costs/ Revenue
Quantity
Total Revenue
Total Costs
Loss
Profit
Breakeven Point
50 Units
100 Units
150 Units
Margin of Safety
= 50

18. Margin of safety

19. Margin of safety
This is the difference between the break-even point and the current level of output.
If Buddy produces 100 cakes in his bakery and his current break-even level is 25 then the margin of safety would be:
Production – Breakeven = Margin of safety
100 – 25 = 75 cakes

20. Limitations of break-even analysis

21. Limitations of break-even analysis
Break-even analysis assumes that every item produced is sold
In a service business the prices may differ
Costs may increase
Its only a best guess of what may happen
IN some businesses the fixed costs are shared across a portfolio of products for example a bakery may produce; crumpets, bread, rolls and tortillas in the same factory. All these products share fixed costs.

22. Sample questions

23. Sample question 3
6 marks
Case study on next slide

25. Answer question 3 Level Mark Skill Possible answer 1 knowledge
Break-even is where total revenue = total costs 2
Application
Anna could make use of break-even analysis to determine how many cup cakes she needs to make to cover her fixed and variable costs 3
3-4
Analysis
Anna can make sure that when she plans the sale of her cakes that she only accepts orders that will cover the cost of electricity and the ingredients 4
5-6
Evaluation
However break-even analysis assumes that all output is sold. Often Anna simply makes to order. Anna also makes a variety of cakes in which case break-even analysis would be useless because it would be too difficult to determine given different size of cakes, ingredients and labour times.

26. Series of videos
Don’t just sit passive through the videos, make notes, pause them to review the information and ask if you have any questions…

27. Revision Video
Another revision video

28. Revision Video

29. Glossary – quick test Revenue (turnover) Break-even Variable costs
Fixed costs
Contribution
Margin of safety
Overheads
Direct costs
Indirect costs
(answers in notes section of slide show – press escape button on keyboard to view)
Revenue (turnover)- income received into the business over a time period
Break-even – the point at which the level of output is where fixed and variable costs are being met by revenue
Variable costs – vary with level of output in the short term
Fixed costs – don’t vary with output in the short term
Contribution – the contribution that a product makes towards paying for the fixed costs of the business
Margin of safety – surplus of planned revenue over planned costs to allow for unforeseen developments
Overheads – indirect costs that are not linked to specific products
Direct costs – costs linked to a specific product
Indirect costs – costs not linked to a specific product