1. 3.3.2 Break-even charts and break-even analysis
The Orangeman
A grocer buys 15 dozen oranges at £0.99 a dozen.
He finds 15 bad oranges in his stock. He sells the rest of the oranges in packs of three.
What is the least amount that three oranges can sell for in order for the grocer to break even?
£0.99 x 15 = £ x12 = 180 oranges. 15 are bad so 165 oranges. 165/3=55 packs. £14.85/55 = £0.27 per pack.
3.3.2 Break-even charts and break-even analysis
3.3.2 Break-even charts and break-even analysis

2. Profit or Break-even?
Making a profit will be the ultimate goal of most businesses but in the short term they may have to be satisfied with breaking even
Making enough revenue to just cover all the costs
No profit is being made but neither is a loss
Break-even can be explained using the concept of contribution
3.3.2 Break-even charts and break-even analysis

3. Contribution and Contribution per unit
3.3.2 Break-even charts and
break-even analysis
Contribution and Contribution per unit
What does the word contribution mean?
when we contribute we give towards something
In business each time a product is sold or service provided what does the money generated (the sales revenue) contribute towards?
It has to firstly pay for its own variable costs and then contribute towards the fixed costs
Until there are enough contributions to cover all the fixed costs the business can not start to make a profit

4. Contribution and Contribution per unit
3.3.2 Break-even charts and
break-even analysis
Contribution and Contribution per unit
Contribution per unit is therefore the difference between selling price per unit and variable cost per unit i.e. how much is left to contribute
Firstly to fixed costs
Secondly to profit
Contribution = Selling Price – Variable Cost
If I sell T-shirts at £11.50, and each one costs me £4.00 to make, then from each item sold I have a contribution of £7.50
Total Contribution is the difference between total sales revenue and total variable costs
If I sell 100 T-shirts total sales revenue is (100 x £11.50) £ 1150 and total variable cost is (100 x £4.00) £400
Therefore total contribution is £ £400 = £750

5. Calculation of Break Even Output
Break even is the point at which a business is not making a profit or a loss i.e. it is just breaking even
Therefore at this point total costs must be the same as total revenue
Each time an item is sold the difference between the selling price and the variable cost is contributed towards the fixed cost
The business has to keep putting this excess (the contribution) towards fixed costs until they are all paid off
3.3.2 Break-even charts and break-even analysis

6. Calculation of Break Even Output
Contribution per unit can therefore be used to calculate break even
Contribution = Selling Price – Variable costs
Fixed Cost / contribution = Break Even point
The fixed costs to manufacture the T-shirts is £15000, premises, machines, irons, advertising
Contribution = £ £4.00 = £7.50
Fixed Cost / contribution = break even point
£15000 / £7.50 = 2000
The business would have to sell 2000 T-shirts to break even
3.3.2 Break-even charts and break-even analysis

7. Calculation of Break Even Output
3.3.2 Break-even charts and
break-even analysis
Calculation of Break Even Output
Remember break even is where neither a profit or a loss is being made (TC = TR)
No of T-shirts
1000
2000
3000
Fixed Costs
15000
Variable Costs
4000
8000
12000
Total Costs
19000
23000
27000
Total Revenue
11500
34500
Loss/Profit
(15000)
(7500)
7500

8. Question time 2 marks
A business manufactures rocking horses. The table shows their predicted figures for the next year. How many rocking horses do they need to sell to breakeven? rocking horses
Selling price per rocking horse
100
Variable cost per rocking horse 40
Fixed costs
12 000

9. 3.3.2 Break-even charts and
break-even analysis
Break Even charts
An alternative to calculating break even via contribution is to plot the lines on a break even chart
This makes it easy to see where the break even point is i.e. where Total Costs = Total Revenue
Break Even point should be read off the horizontal axis and therefore expressed as a number of units e.g T-shirts

10. Break Even Charts – the build up
3.3.2 Break-even charts and
break-even analysis
Break Even Charts – the build up
No of items
Fixed costs stay the same and are therefore a straight horizontal line
Variable costs change in relation to the number of items produced and therefore start at zero and slope upwards
Total Costs are fixed costs plus variable costs and therefore start at the point of fixed costs and then slope upwards at the same gradient as variable costs.
No of items
No of items

11. Break Even Charts – the build up
3.3.2 Break-even charts and
break-even analysis
Break Even Charts – the build up
Total Revenue increases with the amount of units sold and therefore starts at 0 and slopes upwards
We now have to put our cost and revenue lines together to find the break even point. The important 2 lines being total costs (TC) and total revenue (TR).
No of items
No of items TR TC
Break Even Point
TC=TR
Break Even Output read off the horizontal axis

12. Break Even Chart – T-shirts
3.3.2 Break-even charts and
break-even analysis
Break Even Chart – T-shirts
What are the fixed costs at 2000 units?
What are the variable costs at 2000 units?
What are the total costs at 1000 units?
What is the total revenue at 3000 units?
What is the breakeven level of output?

13. Drawing a breakeven Chart
A business manufactures computer desks. Fixed costs = £ Variable cost per desk = £22 Selling price = £47 Draw a break even chart Step 1: Complete the table Step 2: plot the total cost and total revenue line on graph paper Step 3: label the breakeven point
Desks
200
400
600 FC VC TC TR

14. Financial Planning – Break Even
Prior to trading an entrepreneur may draw a break even chart or calculate break even to help see if their proposal is feasible i.e. how many units will they need to sell to break even
This can then be compared to predicted sales estimated from market research
If predicted sales is greater than break even point they may then consider by how much
The difference between predicted sales, if higher than break even, and the break even point is known as the margin of safety
3.3.2 Break-even charts and break-even analysis

15. Using Break Even Charts
3.3.2 Break-even charts and
break-even analysis
Using Break Even Charts
Break even charts can also be used to read off the loss or profit that would be experienced at different levels of sales
No of items TR TC Q1
TC1
TR1
TC1>TR1 = Loss Q2 Q3
TR3
TC3
TR3 >TC3 = Profit
TC2 = TR = BEP

16. Breakeven Chart
At 1500 units will the business make a profit or a loss?
At 2500 units will the business make a profit or a loss?
If they sell 1000 units how much profit or loss is made?
If they sell 3000 units how much profit or loss is made?

17. Using a breakeven chart
As well as identifying costs, revenues, break even and profit or loss a breakeven chart can also be used to:
Identify the margin of safety
the difference between actual output and breakeven output
Actual output – breakeven output = margin of safety

18. Breakeven Charts TR TC Costs and revenues £ Margin of safety FC
Units TC
Margin of safety FC
Actual output
Breakeven output

19. Changing Variables – price, costs and revenues
3.3.2 Break-even charts and
break-even analysis
Changing Variables – price, costs and revenues
Established businesses as well as business start-ups must treat break even with a degree of caution
It is based on the assumption that costs and revenues will be static
In reality this is not true
Businesses are often therefore advised to consider the variables that might change and possibly look at a number of scenarios
Remember variables can change for the better or worse
What variables might change?
Fixed Costs
Landlord puts rent up
Bank changes interest rates
Management want pay increase
Variable Costs
Raw materials change in price
Minimum wage is increased
Utility companies change price
Selling Price
New competition therefore forced to lower price
Positive word of mouth puts demand up

20. Strengths and Weaknesses of Break Even
Allows entrepreneurs to calculate the minimum number of sales needed before starting to make a profit
Can foresee the level of profit or loss at different levels
Can predict the outcome of changing variables
Provides a target
An integral part of a business plan when seeking to secure finance
Aids decision making
Weaknesses
Is based on predicted costs and revenues
Even fixed costs can vary in reality
Ignores changes in variable costs or selling price as items are bought or sold in larger quantities
Only indicates the number of sales needed does not ensure actual sales will materialise
A new entrepreneur may lack experience in predicting costs and hence draw a break even on inaccurate data
3.3.2 Break-even charts and break-even analysis

21. Activity – Break Even Analysis
Trevor is considering setting up a small business selling toffee apples and other confectionery products at fairs and car boot sales in his local area
As part of his market research he agrees to have a small stall at his daughter’s primary school fair selling toffee apples
The stall will cost him £25 for the day
Apples cost £0.20 each and he estimates other costs including toffee and sticks to be £0.10 per apple
Trevor decides to order 100 toffee apples for the day.
What is Trevor’s break even point for the school fair?
How useful will this information be in predicting the break even point for his business venture?
What factors might affect Trevor’s ability to break even a) at the fair b) in the first year of trading?
3.3.2 Break-even charts and break-even analysis

22. Break even Statement True or false Explain your answer
Fixed cost is a horizontal straight line
Total cost line starts at zero
Breakeven point is where total revenue is equal to variable costs
If TC is less than TR a business has passed breakeven point
Margin of safety is to the right of breakeven
If fixed costs go up and everything else stays the same breakeven point will rise