1. Business Opportunity Lunchtime pitch for a sandwich stall
Monday – Friday: 100 customers per day
Average spend per person = £5
Cost of production is about half the selling price
Rent for the pitch
= £1000 per week
Should I do it?

2. Break-even analysis TY

3. Definition
Break Even is the point at which sales revenue is equal to total costs. It is the point at which the business is making neither a profit nor a loss.
So, break-even analysis tells a business how much it needs to sell to cover its costs TY

4. Businesses incur two types of costs
Fixed Costs are
Variable costs are TY

5. Businesses incur two types of costs
Fixed Costs are the costs that do not change in-line with the number of units produced/sold.
Variable costs are TY

6. Businesses incur two types of costs
Fixed Costs are the costs that do not change in-line with the number of units produced/sold.
Variable costs are the cost that do change directly in-line with output. TY

7. Break-even (the point at which a business is making neither a profit nor a loss!)
This is the formula to work out exactly how many units we need to sell to break even
Selling price - Variable costs = “Contribution”
(per unit) (per unit)
Total fixed costs
Contribution
“Contribution” is the amount of money each unit
contributes towards the fixed costs of business
= Break-even Point
(the number of units needed to break-even) TY

8. For Example:
If a product sells for £15 and has variable costs per unit of £11 what is its contribution?
If the business has fixed costs of £20,000,how many units would it need to sell to break-even?
Each unit sold will make a contribution of £4 towards fixed costs of business.
£20,000 ÷ £4 = 5,000 units must be sold in order to break-even
So, 5,000 units = the “break-even point” TY

9. Break Even Example Hackett’s Hair Salon
Kenny Hackett runs a small but very fashionable hairdressing salon. His business has annual fixed costs of £54,000. Kenny has calculated that the cost of providing a standard cut, colour and style is £40.00 and he currently charges £100 for this service.
TASK: Complete the table on the handout then a draw break even chart TY

10. Break Even Chart £ sales/costs The break even point Sales Revenue
TOTAL COSTS
Fixed Costs
Variable costs TY
Number of units

11. Hackett’s Hair Salon
Break Even Point TY

12. Importance of Break-even analysis Limitations of Break-even analysis
Contribution from every unit sold above the breakeven point adds to profits
Breakeven point can provide a target for a business to exceed
It helps to work out whether forecasted sales will produce a profit and whether further investment in product is worthwhile.
Limitations of
Break-even analysis
Does not take into account possible changes in costs over time period
Does not allow for changes in selling price
Analysis is only as good as the quality of the information used
Does not allow for changes in market conditions – e.g. entry of new competitor TY

13. Structure for Break Even content of P6
Define break even and explain how this tool can be useful when running a business.
Explain how it can be a useful step in the budgeting process:
Setting sales targets
Setting targets related to costs
Helping to decide if a proposed deal is good
Demonstrate the calculation of the BEP for Eco Clothing Ltd. (show formula and working from class)
Include the BE table you produced (include the graph you produced as ‘Appendix A’)