1. Unit 5 Operations Management
Break-Even Analysis
Unit 5
Operations Management

2. Learning Objectives
Use graphical and quantitative methods to calculate the break even quantity, profit and margin of safety
HL – Use these methods to analyse the effects of changes in price or cost on break even , profit and margin of safety
HL - Calculate the required output level for a given target revenue or profit
Analyse the assumptions and limitations of break even analysis

3. Break Even Point
The level of output at which total costs equal total revenue

4. Break Even Total Costs = Total Revenue No profit or loss is made

5. Calculating break even
Can be done in 3 ways
Table of costs and revenues method
Graphical method
Formula method

6. 1. The Table Method Hamburger Stall
Stall has to pay $500 for each match day (fixed costs)
Hamburger costs $1 (variable costs)
Sold for $2
What is the break even?
1. The Table Method
Quantity sold
Fixed cost ($)
Variable cost ($)
Total costs ($)
Revenue (Price x Quantity) ($)
Profit / loss ($)
500
(500)
100
600
200
(400)
700
400
(300)
300
800
(200)
900
(100)
1000
1100
1200
1400

7. 2. The Graphical Method – The Break Even Chart
Common to appear on exams (especially SL)

8. 2. The Graphical Method – The Break Even Chart
Break even chart requires a graph with these axes
Costs and sales revenue ($)
Units of output

9. 2. The Graphical Method – The Break Even Chart
The chart itself is drawn showing 3 pieces of information
Fixed costs
Total costs
Sales revenue

10. Break even chart – points to note
Fixed cost line is horizontal showing that fixed costs are constant at all output levels
Variable cost starts at 0 and increases at a constant rate
Total cost line begins at the level of fixed costs but then follows the slope / gradient as variable costs
Sales revenue starts at 0, increases at a constant rate
The point at which total cost and sales revenue line cross is the break even point, below this losses are being made and above profits are being made
Can you plot create a break even chart without even seeing one first?

11. Costs and sales revenue
Full Capacity
Units of output

12. Margin of Safety The amount by which the sales level exceeds the break even level of output

13. Margin of safety Actual Sales – Break Even Output
Useful indication of how much sales could fall without the firm falling into a loss

14. Costs and sales revenue
Margin of safety
Full Capacity
Units of output

15. 3. The Break Even Formula Method
If fixed costs are $200,000 and the contribution per unit of output is $50, then the break even level of production is….
Exact answer therefore likely to be more accurate than many break even graphs
200000 = 50

16. Read the case study thoroughly
Read the case study thoroughly!!! They don’t just give you the figures you may need to do some basic maths first

17. fixed cost

19. X / 100 = 4.5 / 112.5 = 3.94 (This could be rounded to 4)