1. IGCSE Business Studies
4.2.1 – Classify Costs
4.2.3 Break Even Analysis

2. 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.

3. 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

4. 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

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

6. 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

7. 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

8. 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?

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

10. 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.

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

12. 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

13. 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)

14. 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.

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

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

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

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

19. 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.

20. 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.

21. 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