1. 3.3.2 Break-even charts and break-even analysis
The Orangeman
A grocer buys 15 dozen oranges at £0.99 a dozen.
He finds 15 bad oranges in his stock. He sells the rest of the oranges in packs of three.
What is the least amount that three oranges can sell for in order for the grocer to break even?
£0.99 x 15 = £ x12 = 180 oranges. 15 are bad so 165 oranges. 165/3=55 packs. £14.85/55 = £0.27 per pack.
3.3.2 Break-even charts and break-even analysis
3.3.2 Break-even charts and break-even analysis

2. Profit or Break-even?
Making a profit will be the ultimate goal of most businesses but in the short term they may have to be satisfied with breaking even:
_____________________________________
Break-even can be explained using the concept of contribution

3. Contribution and Contribution per unit
3.3.2 Break-even charts and
break-even analysis
Contribution and Contribution per unit
What does the word contribution mean?
when we contribute we___________________________________
In business each time a product is sold or service provided what does the money generated (the sales revenue) contribute towards?
firstly pay for its own ____________________________ and then contribute towards the ___________________________________
Until there are enough contributions to cover all the ____________
_______________________________________________________

4. Contribution and Contribution per unit
3.3.2 Break-even charts and
break-even analysis
Contribution and Contribution per unit
Contribution per unit is therefore the difference between selling price per unit and variable cost per unit i.e. how much is left to contribute to:
Firstly to fixed costs
Secondly to profit
Contribution = Selling Price – Variable Cost
If I sell T-shirts at £11.50, and each one costs me £4.00 to make, then from each item sold I have a contribution of ____________________________
Total Contribution is the difference between total sales revenue and total variable costs:
If I sell 100 T-shirts total sales revenue is ____________________________
and total variable cost is __________________________________________
Therefore total contribution is ___________________________________

5. Calculation of Break Even Output
Break even is the point at which a business is ____________________________________________
Therefore at this point _________________________
_____________________________________________
Each time an item is sold the difference between the selling price and the variable cost _________________
______________________________________________
The business has to keep putting this excess (the contribution) towards ___________________________

6. Calculation of Break Even Output
Contribution per unit can therefore be used to calculate break even
Contribution = Selling Price – Variable costs
Fixed Cost / contribution = Break Even point
The fixed costs to manufacture the T-shirts is £15000, selling price is £11.50 and variable costs per t-shirt is £4.00.
The business would have to sell __________ T-shirts to break even
Workings:

7. Calculation of Break Even Output
3.3.2 Break-even charts and
break-even analysis
Calculation of Break Even Output
Remember break even is where neither a profit or a loss is being made (TC = TR) complete the table below and identify the number of teachers needed to be sold to breakeven.
No of T-shirts
1000
2000
3000
Fixed Costs
15000
Variable Costs
Total Costs
Total Revenue
Loss/Profit
(15000)

8. Question time 2 marks
A business manufactures rocking horses. The table shows their predicted figures for next year. How many rocking horses do they need to sell to breakeven? rocking horses
Selling price per rocking horse
100
Variable cost per rocking horse 40
Fixed costs
12 000

9. 3.3.2 Break-even charts and
break-even analysis
Break Even charts
An alternative to calculating break even via contribution is to plot the lines on a break even chart
This makes it easy to see where the break even point is i.e. where Total Costs = Total Revenue
Break Even point should be read off the horizontal axis and therefore expressed as a number of units e.g T-shirts

10. Break Even Charts – the build up
3.3.2 Break-even charts and
break-even analysis
Break Even Charts – the build up
No of items
Fixed costs
No of items
Variable costs
No of items
Total Costs

11. Break Even Charts – the build up
3.3.2 Break-even charts and
break-even analysis
Break Even Charts – the build up
Total Revenue
No of items
No of items TR TC
Break Even Point
TC=TR
Break Even Output read off the horizontal axis
We now have to put our cost and revenue lines together to find the break even point. The important 2 lines being total costs (TC) and total revenue (TR).

12. Break Even Chart – T-shirts
3.3.2 Break-even charts and
break-even analysis
Break Even Chart – T-shirts
What are the fixed costs at 2000 units?
What are the variable costs at 2000 units?
What are the total costs at 1000 units?
What is the total revenue at 3000 units?
What is the breakeven level of output?

13. Drawing a breakeven Chart
A business manufactures computer desks.
Fixed costs = £10 000
Variable cost per desk = £22
Selling price = £47
TASK: Draw a break even chart
Step 1: Complete the table
Step 2: plot the total cost and total revenue line on graph paper
Step 3: label the breakeven point
Desks
200
400
600 FC VC TC TR

14. Financial Planning – Break Even
Prior to trading an entrepreneur may draw a break even chart or calculate break even to help see if their _____________________________ i.e. how many units will they need to sell to break even
This can then be compared to predicted sales estimated from ____________________________
If predicted sales is greater than break even point they may then consider by how much
The difference between predicted sales, if higher than break even, and the break even point is known as the __________________________________

15. Using Break Even Charts
3.3.2 Break-even charts and
break-even analysis
Using Break Even Charts
Break even charts can also be used to read off the loss or profit that would be experienced at different levels of sales
No of items TR TC Q1
TC1
TR1
TC1>TR1 = Loss Q2 Q3
TR3
TC3
TR3 >TC3 = Profit
TC2 = TR = BEP

16. Breakeven Chart
At 1500 units will the business make a profit or a loss?
At 2500 units will the business make a profit or a loss?
3. If they sell 1000 units how much profit or loss is made?
4. If they sell 3000 units how much profit or loss is made?

17. Using a breakeven chart
As well as identifying costs, revenues, break even and profit or loss a breakeven chart can also be used to:
Identify the margin of safety
the difference between _________________________
_____________________________________________
Formula:

18. Breakeven Charts TR
Costs and revenues
Units TC FC

19. Changing Variables – price, costs and revenues
3.3.2 Break-even charts and
break-even analysis
Changing Variables – price, costs and revenues
Read through each point
Established businesses as well as business start-ups must treat break even with a degree of caution
It is based on the assumption that costs and revenues will be static
In reality this is not true
Businesses are often therefore advised to consider the variables that might change and possibly look at a number of scenarios
Remember variables can change for the better or worse
What variables might change?
Fixed Costs
Landlord puts rent up
Bank changes interest rates
Management want pay increase
Variable Costs
Raw materials change in price
Minimum wage is increased
Utility companies change price
Selling Price
New competition therefore forced to lower price
Positive word of mouth puts demand up

20. Which is a Strengths or Weaknesses of Break Even?
Ignores changes in variable costs or selling price as items are bought or sold in larger quantities
Can foresee the level of profit or loss at different levels
Can predict the outcome of changing variables
Provides a target
A new entrepreneur may lack experience in predicting costs and hence draw a break even on inaccurate data
An integral part of a business plan when seeking to secure finance
Is based on predicted costs and revenues
Allows entrepreneurs to calculate the minimum number of sales needed before starting to make a profit
Even fixed costs can vary in reality
Aids decision making
Only indicates the number of sales needed does not ensure actual sales will materialise