1. © Business Studies Online “A firm Breaks Even if it doesn’t make a profit or a loss” In other words profit = 0 For this to happen the money coming into a business from sales (Total Revenue) must be the same as the money leaving the business from producing the goods or services (Total Cost) This can be shown using the formula for profit: So a firm must identify how many units it must produce AND sell for this to happen “A firm Breaks Even if it doesn’t make a profit or a loss” What Does Break-Even Mean? Profit = Total Revenue - Total Costs

2. © Business Studies Online Calculating The Break Even Point Firstly a business must identify their fixed and variable costs in order to calculate their total costs Remember: Next it must calculate total revenue Remember: It can then either: Calculate profit, and look for an answer of zero, OR Compare TR and TC looking for them to be the same Total Cost (TC)Fixed Costs (FC) =+ Variable Costs (VC) Total Revenue (TR)Price (P) =x Quantity Sold (Q)

3. © Business Studies Online Complete the breakeven worksheet

4. © Business Studies Online The Break Even Chart It is easier to see this information graphically This can be done using a break even chart e.g., using the previous figures: 8000 7000 6000 5000 4000 3000 2000 1000 200 400 600 800 1000 1200 1400 1600 1800 2000 Break-even point TC = TR Output Costs and Revenue (£) FC TC TR LOSS P R O F I T

5. © Business Studies Online The Margin of Safety If a firm is producing AND selling more than the break even level of output then a profit is being made In this situation they are said to have a “Margin of Safety” This is effectively a “safety net”, and can be calculated as: So in our previous example, the margin of safety would be: Actual Sales = 1800 units Break Even Level = 1000 units Margin of Safety = 1800 – 1000 = 800 Actual Sales-Break Even Output

6. © Business Studies Online The Margin of Safety Graphically 8000 7000 6000 5000 4000 3000 2000 1000 200 400 600 800 1000 1200 1400 1600 1800 2000 Break-even point TC = TR Output Costs and Revenue (£) Margin of Safety FC TC TR LOSS P R O F I T

7. © Business Studies Online Contribution method Contribution per unit = selling price of one unit – variable cost per unit Once you take the variable cost away from the selling price, the rest can “contribute” to the total fixed costs We can use this to work out an exact breakeven output

8. © Business Studies Online Creating a graph to calculate break even is time consuming It is quicker to use the following formula: For Example: Using A Formula to Calculate The Break-Even Point Break- Even Point = Fixed Costs Selling Price – Variable Cost Per Unit Fixed Costs£1,200 Variable Costs£15 Selling Price£20 1,200 20 - 15 Break Even Point = 1,200 5 Break Even Point = = 240