IGCSE Business Studies 4.2.1 – Classify Costs 4.2.3 Break Even Analysis

Learning Objectives: L.O. 1 – To identify and classify costs. costs – fixed, variable, average and total L.O. 2 – To examine cost data to help make simple cost-based decisions, e.g. to stop production or continue.

Learning Outcomes: ALL – Can explain fixed, variable, total and average costs MOST – Can calculate total and average costs SOME – Can interpret cost data to make decisions on production

Total Costs = Fixed Costs + Variable Costs Types of Costs Do not vary with output e.g. rent Fixed Vary with output e.g. raw materials Variable Fixed plus variable Total Total Costs = Fixed Costs + Variable Costs

Average Costs Initially when you produce more, your average costs fall. Why?

Average Costs If we add workers and they keep bringing more and more output, then our average costs fall, but our average product rises AC = TC/output

Cost Tables Output Total Fixed Total Variable Total Costs Average cost per unit $3000 1000 $2000 2000 $4000 3000 $6000 4000 $8000 5000 $10000 6000 $12000

Why costs are important To set price To set output To profit maximize High costs = high price Low costs= low price Can you afford to produce more? What is the level at which we break even? When do we make profit?

Revenue Types of Revenue Total Revenue = all the money coming into your company through sales Average Revenue = Total Revenue / Output

Revenue Revenue is the income to the business generated by sales. As sales ( or output ) increases revenue increases. 10 sales at £10 each = £100 in revenue. 100 sales at £10 each = £1000 in revenue. 1000 sales at £10 each = £10,000 in revenue.

Revenue £ Revenue Total Costs Variable costs Fixed costs Number of units produced.

Profit Margins A profit margin is the amount of money made on a specific good. Calculated by: Selling Price per unit – Average Cost per unit = Profit Margin

Break-Even Analysis Break Even Analysis is the use of cost graphs to work out how much to produce. To break even means to cover our total costs. Break even level of output is: TFC / (Price per unit – Variable Cost per unit)

Break-even. A business “breaks even” when it’s income from sales equals it’s total costs. Break even = no profit and no losses. Revenue = Total Costs.

Where is the break even point? Revenue Total Costs Variable costs £ Fixed costs Number of units produced.

Break even. £ Revenue Total Costs Variable costs Fixed costs Number of units produced.

Break even – simplified. Revenue Total Costs £ Number of units produced.

Break even – simplified. Revenue Total Costs Profits Losing money £ Number of units produced.

The margin of safety The difference between break even and actual sales when in profit. Revenue Total Costs Profits Losing money £ Number of units produced.

Break even point for Fredrick’s Ice Cream Margin of safety Revenue Total Costs Revenue & Cost at break even £? Profits Losing money £ Quantity at breakeven ? Number of units produced.

Limitations of Break Even Analysis External influences remain constant Perfect information is available Is output always sold? No price discrimination Assumes fixed costs are constant