BREAK-EVEN ANALYSIS LEARNING OBJECTIVES 1.To understand and calculate the contribution 2.To check understanding and calculation using the breakeven formula 3.To learn how to construct and interpret a breakeven graph 4.To understand the limitations of breakeven analysis

POINT AT WHICH A BUSINESS IS NEITHER MAKING A PROFIT OR LOSS BREAKEVEN

List as many costs a business may incur

Classification of costs Fixed costs – those costs that do not change regardless of the level of production Variable costs – those costs that do change directly with the level of production = Total costs +

GROUP TASK Identify the fixed and variable costs for one of the following businesses: Nightclub Local newsagent Driving school

WORKSHEET 1

Individually work on TASK b

1. How are business costs classified? 4. What is meant by the breakeven point? 3. What is meant by a variable cost? Give an example 2. What is meant by a fixed cost? Give an example

5. What is the formula for calculating breakeven? 6. Calculate breakeven using the following figures: Selling price pu £10 Variable costs pu £3 Fixed costs £5, Breakeven = 714 units

WORKSHEET 2

Margin of safety The amount between the current output and breakeven Current output – breakeven output Sales revenue Income earned from sales Selling price x quantity sold

Individually work on TASK b

TASK b

1. How are business costs classified? 4. What is meant by the breakeven point? 3. What is meant by a variable cost? Give an example 2. What is meant by a fixed cost? Give an example

5. What is the formula used to calculate breakeven? 8. How is the MoS calculated? 7. What is meant by the margin of safety? 6. What 3 pieces of information are needed to calculate breakeven?

9. Is a business making a profit below the breakeven point? 12. Why is the contribution important to a business? 11. How is contribution calculated? 10.What is meant by contribution?

The breakeven can be used to explore changes in a number of key variables. These may include: By looking at the breakeven chart it is possible to predict the effects of changes in sales trends. Eg a sudden fall in sales may lead to a loss and a sudden increase may improve profitability. Sales volume and value Profits or losses at a given level of production The breakeven chart enables a business to monitor levels of production. By doing this, important decisions can be made if changes take place. Prices It is possible to use the breakeven chart to analyse different business scenarios. Eg given market research information, what would happen if changes take place. The effects of any sudden changes in costs can be plotted on the breakeven chart. Costs

Advantages of breakeven analysis

Easy and quick to do Help in persuading bank for loan Can ask what if questions about costs, revenue and profits Breakeven point and margin of safety seen immediately

Limitations of breakeven analysis

Variable costs and sales lines are unlikely to be linear as discounts, special contracts and overtimes payments mean the cost line is more likely to be curved Assumes business sells all the products, without any wastage If data wrong, then results are wrong Easy and simple for single product not for multi- products Tells you how many units you need to sell, not how many you will sell Fixed costs can vary with output overtime and a stepped fixed cost line would be more accurate Breakeven charts depict short-term relationships, and forecasts are therefore unrealistic when the proposals cover a number of years

HOMEWORK CASE STUDY Eddie Bowen’s breakeven chart