1. 2F
Break Even Analysis

2. What is it?
It allows us to estimate how many items need to be sold in order to cover all costs
It calculates what needs to be sold (necessary future sales) before profits can be earned
It is based on estimating total costs and total revenue (takings)

3. Fixed Costs and Variable Costs
Total Costs
are made up of:
Fixed Costs and Variable Costs

4. Fixed Costs - are costs which do not rise as sales rise
For example a firm will not be charged more rent just because it increases its sales to customers
so rent is a fixed cost
other fixed costs are insurance, heating and lighting, bank interest on a loan

5. Fixed Costs shown as a graph fixed costs behave like this: Costs £ 500
400
300
200
100
Fixed Costs
Units Sold each week

6. Variable Costs - are costs which vary as sales vary -
they rise when sales rise and fall when sales fall
they are directly linked to sales – they vary with sales
so the cost of packaging is a variable cost
another variable cost is the cost of giving a free gift with every item sold

7. Variable Costs shown as a graph variable costs behave like this: Costs
500
400
300
200
100
Units Sold each week

8. Costs
£ Total Cost
Variable Cost
500
400
Fixed Cost
200
100
Units Sold each week

9. Sales Revenue this is the money taken when items are sold
Total sales revenue is the number of units sold times the unit price
If you sell 100 items a week at the price of £2 each then
Sales Revenue is 100 x £2 = £200

10. Sales Revenue shown as a graph Sales Revenue behaves like this: Costs
Sales Revenue
500
400
300
200
100
Units Sold each week at £2 each

11. How do we find Break Even Point?
Find the sales level where Total Cost and Sales Revenue meet
Costs Sales Revenue
Total Cost
500
400
300
200
100
Costs are covered when
300 units per week as sold

12. A Formula for Break Even
Fixed Costs
Selling Price – Variable Cost
(per item) (per item)

13. Key Words Fixed Costs - costs that remain the same even as sales rise
Variable Costs – costs that rise as sales rise
Total Costs – Fixed Costs plus Variable Costs
Break-Even Point – the level of sales at which all costs are just met
Break-Even Chart – graph that plots sales revenue and total costs and indicates break-even point
Return – selling price minus variable cost also known as contribution (how much of the selling price which contributes to meeting fixed costs and then profit)