1. Break-even
BTEC L2

2. Learning Objectives
To be able to calculate the break-even quantity for a business
To be able to create a break-even chart
To be able to calculate the level of profit generated from a break-even chart

3. What is break-even?
Break-even occurs when a business generated enough income to cover its costs. It is the point at which there is neither a profit nor a loss.

4. Break-even
Using a formula

5. Fixed costs selling price - variable costs
Formula
Fixed costs selling price - variable costs

6. John’s Bakery
John has a bakery and needs you to tell him exactly how many cakes he must sell in order to break-even

10. Margin of Safety
The Margin of Safety is used to indicate the amount of sales that are above the break-even point.
In other words, the Margin of Safety indicates the amount by which a company's sales could decrease before the company will become unprofitable.

11. Creating a break-even chart
Using graph paper create a chart for the following table

12. Quantity
Fixed Cost
Total Variable Costs
Total Cost
Total Revenue
£1,500.00
£0.00 50
£300.00
£1,800.00
£750.00
100
£600.00
£2,100.00
150
£900.00
£2,400.00
£2,250.00
200
£1,200.00
£2,700.00
£3,000.00
250
£3,750.00
300
£3,300.00
£4,500.00

13. The Complete Chart £ Costs/ Revenue Breakeven Point Quantity Q
TOTAL REVENUE TR
Breakeven
Point
TOTAL COSTS TC
Breakeven Sales Revenue
FIXED COSTS FC
VARIABLE COSTS VC
Breakeven
Quantity
Quantity Q

14. Analysis of the effect on the break-even point if the figures change

15. Charlie sells Christmas Trees

16. Sales v Costs
The break-even point changes if sales or costs change. For example, if Charlie has to pay more for his trees, his costs will increase.
He will either have to increase his selling price (which could mean he sells fewer trees), or earn less money on each tree.
This means he will have to sell more to break-even.

17. Type of change
Effect on break-even point
Increase in sales
The margin of safety increases
Decrease in sales
The margin of safety decreases. If sales fall below the break-even level, the business could make a loss.
Increase in costs
The number of sales required to break-even increases so the profit level would fall or even become a loss.
Decrease in costs
Break-even point is lower so the business makes more profit.
From the table we can see that increased sales and decreased costs are good. However, if sales fall or costs increase, then action must be taken before the business makes a loss.
For example, if raw material costs increase, the business could look for a cheaper substitute or try to get the same material from another supplier.

18. Importance of break-even analysis and the risks of ignoring it
Someone starting out in business must understand the costs involved in selling a product as well as be able to predict future sales. Without knowing these, the business could stock too many items or try to sell them at too high or too low a price.
The value and importance of break-even analysis is that it could show that some business propositions would not be sensible, because the costs are too high and a profit would never be made.

19. Benefits
Risks
Both the fixed and variable costs are known.
Cost are unknown and/or too high.
Projected sales revenue is calculated.
The selling price is too low or too high.
The owner knows how many items must be sold to make a profit.
The owner has no idea how many items must be sold to make a profit.
The owner can make adjustments to try to make a profit sooner, e.g. reduce costs of obtaining cheaper materials or increase selling price.
The business makes a loss over a long period of time without any action being taken.
The margin of safety is known.
The margin of safety is unknown.
The best goods are stocked and sold at the optimum price so the business is successful.
Stock costs too much, is sold at the wrong price (maybe at less than cost price!) and the business fails.