1. LESSON 6

2. Topics Covered Business Costs Revenue Profit Expenditure
Break Even Analysis
Budgeting
Cash Flow Forecast
Profit & Loss
Balance Sheet
Maximising Profits

3. ‘Break–Even’ Brain Teaser!
How many words can you find in the business term:
‘Break–Even’
= 5mins

4. LO1) To define the term break even
UNIT TITLE: Unit 2:Finance for Business
LESSON TITLE: Break-even Analysis
LEARNING AIM: B
COMPETENCY FOCUS:
Key Skills (L5): you will be able to develop your numeracy skills to calculate financial transactions of a business and to interpret financial data.
Learning Objectives
By the end of the lesson, you should be able to…
LO1) To define the term break even
LO2) To describe why a business might carry out break even analysis

5. Key terms from last lesson!
Firms spend money making their products. These are called costs.
Variable costs = Change depending on output.
Fixed costs = remain the same no matter how much is produced.
Total Costs = Fixed Costs + Variable Costs.
Firms get money from selling their products. This is called sales revenue.
Total Revenue = Price Per Unit x Sales.

6. Introduction to Break Even
“A business breaks even if it doesn’t make a profit or a loss”
It is the point at which the business makes just enough revenue to cover their costs.
In other words PROFIT = 0
Businesses must make a profit to survive.

7. Introduction to Break Even
To make a profit, revenue must be higher than costs.
It is where Costs = Revenue within a business.
New businesses should always conduct a break-even analysis to find the break-even point. This tells them how much they need to sell to break even.

8. Is the business breaking even?
CoolMobile Ltd makes fun cases for mobile phones. Each case sells for £6. Fixed costs per year are £10,000 and variable costs are £2 per case (unit). The maximum cases that the company can make in 1 year is Use this data to construct a clear table.

9. Is the business breaking even?
Units of Output (Cases)
Fixed Costs (£)
Variable Costs (£)
Total Costs (£)
Total Revenue (£)
Profit or loss?
500
1,000
1,500
2,000
6,000

11. Test your knowledge… What does the term break-even mean? [2]
Why is it important for a business to calculate their break-even? [2]
What does break-even analysis show a business? [1]
[Max 5marks]

12. LESSON 7

13. Topics Covered Business Costs Revenue Profit Expenditure
Break Even Analysis
Budgeting
Cash Flow Forecast
Profit & Loss
Balance Sheet
Maximising Profits

14. “A business breaks even if it doesn’t make a profit or a loss”
Let’s Re-cap!
“A business breaks even if it doesn’t make a profit or a loss”
It is the point at which the business makes just enough revenue to cover their costs.
In other words PROFIT = 0
Businesses must make a profit to survive.

15. Let’s Re-cap! To make a profit, revenue must be higher than costs.
It is where Costs = Revenue within a business.
New businesses should always conduct a break-even analysis to find the break-even point. This tells them how much they need to sell to break even.

16. Numeracy Task Rounding Numbers Round 23745 to the nearest thousand.
First, look at the digit in the thousands place. It is 3. This means the number lies between and Look at the digit to the right of the 3. It is 7. That means is closer to than
Remember
The rule is, if the next digit is: 5 or more, we 'round up'. 4 or less, it stays as it is.
23745 to the nearest thousand =
23745 to the nearest hundred =

17. Numeracy Task Rounding & Estimating Now you have a go…
What is rounded to the nearest ten?
A company made profit last year of £7,821. What is this figure to the nearest £10?
A theme park had 9,462 visitors last year. Round this figure to the nearest 10 visitors.
The distance from London to Glasgow is 418 miles. Round this to the nearest 10 miles.
23750
7820
9460
420

18. To calculate break even using the correct formulae (Gui-Reg)
UNIT TITLE: Unit 2:Finance for Business
LESSON TITLE: Break-even Analysis (Formula)
LEARNING AIM: B
COMPETENCY FOCUS:
Key Skills (L5): you will be able to develop your numeracy skills to calculate financial transactions of a business and to interpret financial data.
Learning Objectives
By the end of the lesson, you should be able to…
To calculate break even using the correct formulae (Gui-Reg)

19. Where is the Break-even Point (BEP)?

20. Calculating Break-Even Point (BEP)
BREAK-EVEN POINT (BEP)= the point at which revenue equals expenditure!
There are two ways to calculate the break-even point (BEP):
USING A FORMULA (CONTRIBUTION METHOD)
PRODUCING A BREAK EVEN CHART.

21. CONTRIBUTION METHOD (FORMULA)
This involves a two part calculation:
Selling Price per unit – Variable Cost Per Unit = Contribution (Towards Fixed Costs).
AND
Fixed Costs / Contribution = Break-even Point.

22. AN EXAMPLE
If Fixed Costs = £2000, Variable Costs = £8 Per Unit, Selling Price Per Unit =£10. Then Break-even would be:
Price Per Unit – Variable Cost Per Unit = Contribution (Towards Fixed Costs).
£10 - £8 = £2 (Contribution Towards Fixed Costs)
Fixed Costs / Contribution = Break-even Point.
£2000 / 2 = 1000
1000 products will need to be sold in order to break-even and cover all their costs.

23. TASK 1
Harry sets up a business to print T-shirts. The fixed costs of premises and the T-shirt printers are £3000. The variable costs per T-shirt (the T-shirt, ink, wages) are £5. Each printed T-shirt sells for £25.
NOW YOU TRY!

24. ANSWER
Harry sets up a business to print T-shirts. The fixed costs of premises and the T-shirt printers are £3000. The variable costs per T-shirt (the T-shirt, ink, wages) are £5. Each printed T-shirt sells for £25.
Price Per Unit – Variable Cost Per Unit = Contribution (Towards Fixed Costs).
£25 - £5 = £20 (Contribution Towards Fixed Costs)
Fixed Costs / Contribution = Break-even Point.
£3000 / 20 = 150
150 T-shirts will need to be sold in order to break-even and cover all their costs.

25. LET’S TRY AGAIN!
A business making and selling Hoovers has the following costs:
Fixed Costs £50,000 per year
Variable Costs £3.70 per t-shirt
Selling Price £12 each
Calculate the break-even point?

26. ANSWER…
Price Per Unit – Variable Cost Per Unit = Contribution (Towards Fixed Costs).
£12 - £3.70 = £8.30 (Contribution Towards Fixed Costs)
Fixed Costs / Contribution = Break-even Point.
£50,000 / 8.30 = 6,024
6,024 Hoovers will need to be sold in order to break-even and cover all their costs.

27. TASK 2
Produce an instruction booklet that teaches a local business owner how to calculate their break-even. [This will form part of your revision notes!]

28. LESSON 8

29. Topics Covered Business Costs Revenue Profit Expenditure
Break Even Analysis
Budgeting
Cash Flow Forecast
Profit & Loss
Balance Sheet
Maximising Profits

30. What is the formula (contribution method) for calculating break-even?
Let’s Re-cap!
What is the formula (contribution method) for calculating break-even?

31. Let’s Re-cap!
TASK:
Claire’s Chocolates makes handmade chocolates. Each chocolate sells for 80p and has variable costs of 20p. The fixed costs of the business are £18,000.
How many chocolates does Claire need to sell to break even?

32. Calculating Break-Even Point (BEP)
BREAK-EVEN POINT (BEP)= the point at which revenue equals expenditure!
There are two ways to calculate the break-even point (BEP):
USING A FORMULA (CONTRIBUTION METHOD)
PRODUCING A BREAK EVEN CHART.

33. CALUCULATING BREAK-EVEN POINT USING GRAPH
Break-even graphs show costs and revenue plotted against output
Output goes on the horizontal axis (starting from 0)
Costs and revenue both go on the vertical axis
STEP 1: draw you axis, label ‘y’ axis ‘costs/revenue’ & label ‘x’ axis with ‘No of units sold’
STEP 2: Draw your fixed costs line
STEP 3: Add your total costs line (calculate the total costs for two points on graph & draw best-fit line)

34. CALUCULATING BREAK-EVEN POINT USING GRAPH
STEP 4: Draw your sales revenue line (again calculate this for two points on graph and draw in best-fit line) STEP 5: Draw & label your BE point where your total costs and sales revenue lines cross over.

36. Key Words
Margin of Safety: The amount by which demand can fall before a business makes a loss.

37. Task - Evans Cricket Bats Ltd
Output (No of cricket bats)
Fixed costs
Variable costs
Total costs
Sales revenue
1,000
£40,000
2,000
3,000
£100,000
4,000
£140,000
Fixed costs = £40,000
Variable costs £2 per cricket bat
Total costs = Fixed + variable costs
Sales revenue = Selling price x output
Cricket bats sold for £35 each

38. Stage 1: calculating costs & revenue
Output (No of cricket bats)
Fixed costs
Variable costs
Total costs
Sales revenue
1,000
£40,000
£20,000
£60,000
£35,000
2,000
£80,000
£70,000
3,000
£100,000
£105,000
4,000
£120,000
£140,000
Fixed costs = £40,000
Variable costs £2 per cricket bat
Total costs = Fixed + variable costs
Sales revenue = Selling price x output
Cricket bats sold for £35 each

39. Stage 2: DRAW the graph
Turn your paper so it is LANDSCAPE and copy this.
Costs (£)
Students need to deepen their knowledge and understanding by demonstrating what they have learned. This should be a challenging activity, designed to test all they skills, knowledge and understanding previously acquired during the lesson.
1000
2000
3000
4000
Output (No of cricket bats)

40. Stage 3: Showing costs on a graph.
Insert fixed costs.
Costs (£)
Students need to deepen their knowledge and understanding by demonstrating what they have learned. This should be a challenging activity, designed to test all they skills, knowledge and understanding previously acquired during the lesson.
1000
2000
3000
4000
Output (No of cricket bats)

41. Stage 3: Showing costs on a graph.
Calculate total costs.
Fixed costs
Variable costs
Costs (£)
Total costs
Students need to deepen their knowledge and understanding by demonstrating what they have learned. This should be a challenging activity, designed to test all they skills, knowledge and understanding previously acquired during the lesson.
1000
2000
3000
4000
Output (No of cricket bats)

42. Stage 4: Showing revenue on a graph
Now add revenue to your graph.
Fixed costs
Variable costs
Costs (£)
Total costs
Students need to deepen their knowledge and understanding by demonstrating what they have learned. This should be a challenging activity, designed to test all they skills, knowledge and understanding previously acquired during the lesson.
1000
2000
3000
4000
Output (No of cricket bats)

43. Stage 4: Showing revenue on a graph
Now add revenue to your graph....
Fixed costs
Costs and sales revenue (£)
Variable costs
Total costs
Students need to deepen their knowledge and understanding by demonstrating what they have learned. This should be a challenging activity, designed to test all they skills, knowledge and understanding previously acquired during the lesson.
Sales revenue
1000
2000
3000
4000
Output (No of cricket bats)

44. Stage 5: revealing the break-even point
Break-even is point is where revenue line crosses the total costs line.
Fixed costs
Costs and sales revenue (£)
Variable costs
Total costs
Students need to deepen their knowledge and understanding by demonstrating what they have learned. This should be a challenging activity, designed to test all they skills, knowledge and understanding previously acquired during the lesson.
Sales revenue
1000
2000
3000
4000
Output (No of cricket bats)

45. Is the business breaking even?
CoolMobile Ltd makes fun cases for mobile phones. Each case sells for £6. Fixed costs per year are £10,000 and variable costs are £2 per case (unit). The maximum cases that the company can make in 1 year is Use this data to construct a clear table.

46. Is the business breaking even?
Units of Output (Cases)
Fixed Costs (£)
Variable Costs (£)
Total Costs (£)
Total Revenue (£)
Profit or loss?
500
1,000
1,500
2,000
6,000

48. Is the business breaking even?
Use your table to construct a break-even graph. This can be done using graph paper.

49. TASK 1
Complete task on pg.68/69.

50. TASK 2
Complete activities in the break-even workbook. [40mins]

51. The Importance of Break-even
Helps a business make decisions about the business
Calculate the effect of a change in price
Calculates the effect of a change in costs
Estimates the level of output needed to cover costs
Provides evidence to the bank when applying for a loan.

52. The Limitations of Break-even
It assumes that the firm can sell any quantity of the product at the current price. In practice the firm may need to reduce prices to sell at high levels of output.
It assumes fixed costs never change - but as output increases the firm may need to buy more machines, get bigger premises, take on extra sales and administration staff.
It assumes that all products are sold. This doesn’t always happen; some products may only be sold at lower prices or need to be thrown away.

53. TASK 3
Complete GCSE Bitesize Testbite