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© Boardworks Ltd 2008 1 of 11 3.2 Break-Even Analysis Unit 3: Investigating Financial Control 3.2 Break-Even Analysis Unit 3: Investigating Financial Control © Boardworks Ltd 2008 1 of 11
© Boardworks Ltd 2008 2 of 11 Contents Teacher’s notes included in the Notes Page Flash activity (these activities are not editable) Printable activity Key skills © Boardworks Ltd 2008 2 of 11 For more detailed instructions, see the Getting Started presentation
© Boardworks Ltd 2008 3 of 11 Calculating the break-even point Constructing a break-even chart Using the break-even formula © Boardworks Ltd 2008 3 of 11 In this section, you will learn how to work out the break-even point.
© Boardworks Ltd 2008 4 of 11 Working out the break-even point You can work out the break-even point in two different ways: Break-even chart Break-even formula A break-even chart allows you to plot the break-even point on a graph, in order to work out approximately how many units you need to sell to cover your costs. You can also work out the break-even point using a formula. This gives a more exact answer than a break-even chart, as it calculates the break-even point with complete accuracy.
© Boardworks Ltd 2008 5 of 11 An example of a break-even chart
© Boardworks Ltd 2008 6 of 11 Ice cream van business break-even
© Boardworks Ltd 2008 7 of 11 Drawing a break-even chart
© Boardworks Ltd 2008 8 of 11 Drawing a break-even chart
© Boardworks Ltd 2008 9 of 11 Break-even point = fixed costs (selling price - variable cost per unit) Using a formula to find the break-even point As it can be difficult to get an accurate BEP from a graph, and graphs can be time-consuming to draw, it is sometimes easier to use this formula to find the BEP: Work out the break-even point for the ice cream van business using this formula. Do you get the same answer as you did when you drew the graph? Break-even point = £100.00 (£1.50 - £0.50) = 100 ice creams.
© Boardworks Ltd 2008 10 of 11 Margin of safety = Why do you think it is desirable to have a healthy margin of safety? actual sales - sales needed to break even Finding the margin of safety The margin of safety is the number of sales above the break-even point. A business can check its margin of safety using the following formula: For example, if the ice cream van business sells 200 ice creams (and the break-even point is 100 ice creams) its margin of safety is: Margin of safety = 200 - 100 Margin of safety = 100
© Boardworks Ltd 2008 11 of 11 Assignment: ice cream van business Ice cream van business Using the figures already given, work out the following: Fixed costs increase to £120 a week Variable costs decrease to 35p an ice cream You reduce the selling price of your ice creams to £1.10 each. 3) Why do more ice creams need to be sold in order to break even when the selling price is reduced? © Boardworks Ltd 2008 11 of 11 1) Calculate the margin of safety if: 150 ice creams were sold 300 ice creams were sold. 2) Calculate the break-even point if:
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