1. Drawing a Break Even

2. Learning Objectives Understand the principal of break-even.
Appreciate how to draw and interpret break- even charts.
Understand how to calculate the break-even point and the margin of safety.

3. Which businesses use break-even?
Chelsea F.C. will use break- even analysis using:
Total Revenue such as shirt sales, ticket sales & sponsorship.
Total Costs such as player wages, transfers, stadium maintenance.
Topshop will use break- even analysis using:
Total Revenue such as dress, bag and shoe sales.
Total Costs such as staff wages and rent!

4. Break Even Definition Alert!!
What is it?
Which formulae do we need?
‘It is the level of output where revenues just equal costs’
Total Revenue = Quantity Sold x Average Price
Total Variable Costs = Quantity Sold x Variable Cost
Total Costs = Fixed Costs + Variable Costs
Return to questions!

5. Create your BE table... How much profit/loss have you made?
How many have you sold?
What are your Total Costs?
How much revenue do you make based on this many sales?
Total Fixed Costs
(This stays the same throughout!)
What are the Total Variable Costs?

6. The 5 point process to building a break even chart!
Stage 1 – Create your graph!
For example....
Create two axis on a graph and label them with sales and revenue (use relevant figures!)
Label Revenue on the y-axis
Label Sales on the x-axis

7. The 5 point process to building a break even chart!
Stage 2 – Insert your revenue line!
For example....
Can you remember the equation we need for REVENUE?
Find equations!
Insert your revenue line
REMEMBER:
THE REVENUE LINE STARTS FROM 0!

8. The 5 point process to building a break even chart!
Stage 3 – your Fixed Costs!
For example....
At this point you should have created you total costs table!
What were the two equations we needed for costs?
Find equations!
Now draw on your fixed costs – this line is always flat!
REMEMBER F for FLAT!
Fixed costs of £120,000

9. The 5 point process to building a break even chart!
Stage 4 – Your Variable Costs!
Variable cost line – also called total costs!
For example....
Now draw on your variable costs!

10. The 5 point process to building a break even chart!
Break-Even Point! Hurrah!
Stage 5 – Find Your Break Even Point!
For example....
Where the Total Revenue line crosses the Total Costs line is the Break Even Point!
You can calculate the amount of sales you need to make by drawing a line down to the x axis!

11. Now it’s your turn...
You work for Chelsea Football Club, and they have asked you to carry out a break even analysis based on shirt sales!
You will need to calculate how many shirts the club needs to sell to reach their break-even point this season!
Once you have completed the figures in the table, create your BE chart on graph paper!
Did you know? When David Beckham signed for LA Galaxy, he had sold over 250,000 shirts before he had even arrived at the club!

12. Forget to buy your own shirt David?

13. Chelsea Predicted Financial Information for 2011-2012:
Fixed Costs £5 million
Variable Cost per shirt £5
Shirt Price £40
Need the equations again?
Click here!
Shirt Sales
Total Revenue (£ millions)
Total Fixed Costs (£ millions)
Total Variable Costs (£ millions)
Total Costs (£ millions)
Profit & Loss (£ millions)
100,000
200,000
300,000
400,000
500,000
Table Answers
Finished the table? Start drawing your BE graph!!

14. Variable Cost per shirt £5
Chelsea Predicted Financial Information for :
Fixed Costs £5 million
Variable Cost per shirt £5
Shirt Price £40
Shirt Sales
Total Revenue (£ millions)
Total Fixed Costs (£ millions)
Total Variable Costs (£ millions)
Total Costs (£ millions)
Profit & Loss (£ millions)
100,000 4 10
0.5
10.5
(6.5)
200,000 8 1 11
(3)
300,000 12
1.5
11.5
400,000 16
2.0
12.0
500,000 20
2.5
12.5
7.5

15. Feeling confident?
I will choose five people to contribute to the break-even graph on the board.
There are roles for the following aspects:
Drawing the axis
Drawing the Revenue
Drawing the Fixed Costs
Drawing the Variable Costs
Finding the Break-Even Point
How did you get on with the graph? Remember to show your working when doing your calculations!

16. What is the Margin of Safety?
Definition Alert!!
MARGIN OF SAFETY = ACTUAL PRODUCTION LEVEL – BREAK-EVEN PRODUCTION LEVEL
If the level of shirt sales was actually 350,000 shirts, what is the Margin of Safety for Chelsea?