1

Calculating a break-even point

Aim: Students to be able to produce a breakeven graphHomework: Complete hand out

2

Keywords – recap last section

Fixed cost Variable cost Start up costs Running Costs Profit Total cost Semi-variable cost Unit Revenue

3

Target Learning Objective Outcome Who? Keywords

Explain, interpret and use a simple break-even chart

•Understand why you use a break even graph

ALLD

(AO1)

Previous vocabulary:Running CostsFixed costVariable costSelling PriceRevenue

New Words:BreakevenContribution

Construct a simple breakeven chart

Interpret a given chart and use it to analyse a situation

I can draw and read a breakeven graph from given data

MOSTC-B

(AO2 & 3)

Show understanding of the limitations of a break even chart

•I can discus the uses of a Breakeven graph

SOMEA

(A04)

HW: Prepare notes: Chapter 2

4

The basics of break-even analysis

Businesses must make a profit to survive To make a profit, income must be higher

than expenditure (or costs)

Income $50,000 Costs $40,000

Profit $10,000

Income $50,000 Costs $60,000

Loss $10,000

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The break-even point

Variable + fixed costs = total costs When total costs = sales revenue, this is

called the break-even point, eg total costs = $5,000 total sales revenue = $5,000

At this point the business isn’t making a profit or a loss – it is simply breaking even.

6

Using a formula to calculate the break-even point

The break-even point =

Fixed costs

(Selling price per unit minus variable cost per unit)

Contribution

7

Applying the formula

Fixed costs

(Selling price per unit minus variable cost per unit)

Tom: $100

($1.50 – 50p)= 100

How to do a table

Units 0 25 50 100 125 150

Fixed costs            

Variable cost            

Total cost            

Selling price            

8

Selling Price 1.5Variable cost 0.5Fixed cost 100

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Activity: 3.2.1 – draw the breakeven graph

Doc. Creating a breakeven chart

Doc. Interpreting a breakeven chart 3.2.3

Doc BE Test2

11

12

Margin of safety

Producing more than the breakeven point.

It is useful to know how much sales can fall before loss is being made.

13

Identifying the break-even point

Tom's ice creams

050

100150200

250300350400450

0 100 200 300

Number sold

Co

st/R

even

ue

£

Sales Revenue

Total Cost

Fixed Cost

Loss

Profit

Break-even point

14

Contribution:

It can be increased by increasing selling revenue

It can be increased by reducing variable costs per unit

It is not the same as profit (fixed costs haven’t been subtracted)

An increase in contribution per unit raises the potential profit