BREAK-EVEN (BE) Unit 2 Business Development Finance GCSE Business Studies

Break-Even Break-Even is the point where: –total sales income is the same as total costs –a business is neither making a profit nor a loss Break-Even can be calculated by formula or graph

Significance of Break-Even Shows the amount of goods needed to be sold in order to cover costs and go on to make a profit Used to set the price of a product Assesses the impact of planned price changes Assesses how changes in fixed and/or variable costs may affect profit

Fixed and Variable Costs Fixed costs: do not change with output have to be paid regardless of the number of items produced Examples of fixed costs include: –Rent –Rates –Insurance Variable costs: do change with output vary according to the number of items produced Examples of variable costs include: –Raw materials –Production wages –Transport of goods

Break-Even Calculation Selling price of the product –(price x quantity) Fixed cost –(costs which do not change with output quantity) Variable costs per unit –(costs which change with output quantity)

Break-Even Formula FIXED COSTS (F) SELLING PRICE PER UNIT (S) minus VARIABLE COSTS PER UNIT (V) F S - V

Total revenue Total costs Fixed costs Break even point Current Output - Number expected to sell Margin of safety Break-Even Chart Costs/ Sales (£) Output (Units) Break-Even Output Area of Loss Area of Profit

Margin of Safety The margin of safety is the amount which a business sells in excess of its break- even point The margin of safety can be calculated by subtracting the output at the break-even point from the current level of output The margin of safety can be measured in units and £’s