1. Break Even

2. Aims for today
To understand what break even is and how it can be used to assist businesses in their planning

3. Starter task: Formula recap

4. Match the formulas Contribution Break Even in units Margin of safety
Total Revenue
Profit or loss?
Selling price x Quantity
Actual production level – break even output
Total revenue – Total costs
Fixed costs/contribution
Selling Price – Variable costs

5. What does break even mean?
Break even is where a firms TOTAL REVENUE is the same as its TOTAL COSTS
(In other words, money coming in = money going out).
At the break even point, a firm is neither making a PROFIT nor A LOSS
Q: Why would it be useful for a toy manufacturing business to calculate its break even point?
To understand the role & purpose of break even analysis

6. Break even
Break even analysis is useful as a business can work out what volume of sales it needs to achieve to cover its costs.
The key to break even is to work out the contribution made from the sale of each unit.
The amount of money from each unit sold contributes to pay for the fixed and indirect costs of the business.

7. To understand the role & purpose of break even analysis
Break even formula
Contribution
To understand the role & purpose of break even analysis

8. Contribution = selling price less variable costs per unit (SP - VC)
Contribution formula
Contribution = selling price less variable costs per unit (SP - VC)
Cans of coke = £ = 0.75 contribution
Fixed costs are £6,000
BE = FC / Contribution
6,000 / 0.75 = 8000 Cans need to be sold to break even

9. A CD factory has the following costs:
Fixed cost: £10,000
Variable cost: £2
Selling price: £7
Q: Calculate the break even point in units and the break point in revenue.
ANSWER: In units £10,000 / (£7-2) = 2000 units
In revenue: £2,000 x £7 = £14,00

10. Break even point in units =
Fixed costs / contribution £10,000 / (£7-2) = 2000 units

11. Break even point in revenue
Quantity at break even x Selling price
£2,000 x £7 = £14,00

12. Calculating the break even point
Step 1.
Identify fixed & variable costs – add them together to get the TOTAL costs
Step 2.
Calculate the TOTAL REVENUE
To understand the role & purpose of break even analysis

13. Task 1: Calculating break even
To understand the role & purpose of break even analysis

14. To understand the role & purpose of break even analysis
OUTPUT FC VC TC
TR (SP=£4)
Profit
2000
-2000
200
400
2400
800
-1600
2800
1600
-1200
600
1200
3200
-800
3600
-400
1000
4000
4400
4800
1400
5600
5200
6400
1800
7200
6000
8000
To understand the role & purpose of break even analysis

15. Task 2: Draw the break even chart using your data
Label the vertical axis “sales and costs in pounds”.
Label the horizontal axis “sales/production (units)”.
Draw on the BE point
Draw a horizontal line for total fixed costs.
Starting at the Total costs point, draw the total cost line going through the break even point.
Starting at zero, draw the total revenue line through the break even.
Where the sales revenue crosses the total costs line is the break even point.
Read off the units of sales to give the break even level of sales.
The gap between the total costs line and sales revenue line after the break even point represents the level of profit.
To understand the role & purpose of break even analysis

16. To understand the role & purpose of break even analysis
The break even chart
To understand the role & purpose of break even analysis

17. Margin of safety formula
The difference between the planned number of units or actual sales and the number of units of sales at break even point.
Cans of coke: They can make:
10,000 cans potentially – 8,000 actual units at break even
= 2,000 Margin of safety

18. Task 3: Draw the margin of safety
To understand the role & purpose of break even analysis

19. Extension task: Break even worksheet
Complete worksheets: #3 Break Even Analysis #4 Break even charts
To understand the role & purpose of break even analysis

20. Why must businesses understand its break even point?
…because the contribution from every unit sold above the break-even point adds to profit.
The break-even point provides a focus for the business;
It works out whether the forecast sales will be enough to produce a profit and;
Whether or not further investment in the product is worthwhile.

21. Limitations of break-even charts?
Assumes all stock is sold
Does not take into account possible changes in costs over the time period
Does not allow for changes in the selling price.
Analysis is only as good as the quality of information.
Does not allow for changes in market conditions in the time period – e.g. entry of new competitor.

22. Task 4 Hot Dogs
Helen & Joe operate a hot dog stand in the town centre. The stand costs £200 per week to hire. Each hot dog needs one bread roll at 20p, one sausage at 25p and sauces at 5p.
The selling price of each hot dog is £1

23. Complete the table At what quantity do total costs = total revenue
Complete the table At what quantity do total costs = total revenue? (Break even) What profit is made when they sell 600 hot dogs?
QUANTITY
FIXED COSTS
VARIABLE COSTS
TOTAL COSTS
TOTAL REVENUE
PROFIT OR LOSS?
100
150
200
250
300
350
400
450
500
550
600
650

24. Complete the table At what quantity do total costs = total revenue
Complete the table At what quantity do total costs = total revenue? (Break even) What profit is made when they sell 600 hot dogs?
QUANTITY
FIXED COSTS
VARIABLE COSTS
TOTAL COSTS
TOTAL REVENUE
PROFIT OR LOSS?
100
150
200
250
300
350
400
450
500
550
600
650

25. Complete the table At what quantity do total costs = total revenue
Complete the table At what quantity do total costs = total revenue? (Break even) What profit is made when they sell 600 hot dogs?
QUANTITY
FIXED COSTS
VARIABLE COSTS
TOTAL COSTS
TOTAL REVENUE
PROFIT OR LOSS?
100
200 50
250
-150
150 75
275
-125
300
-100
125
325
-75
350
-50
175
375
-25
400
450
225
425 25
500
550
475
600
650
525

26. Task 5
Draw a Break Even chart for the Hot Dog business - Ensure your chart is FULLY and CLEARLY labelled
Draw on the margin of safety (1)
Explain how the Break even analysis will help Helen and Joe (4)
Discuss what strategies Helen and Joe could use to enable them to reach their break even point quicker (6)
Evaluate which of these strategies would be best for the business (6)

27. Plenary 1: Break even drag & drop
To understand the role & purpose of break even analysis

28. Break even drag & drop solution
To understand the role & purpose of break even analysis

29. Plenary 2: Break even piggy bank
To understand the role & purpose of break even analysis

30. Plenary 3: Formula Recap

31. Selling Price – Variable costs
Contribution
Selling Price – Variable costs
To understand the role & purpose of break even analysis

32. Break Even in units Fixed costs/contribution
To understand the role & purpose of break even analysis

33. Break Even Revenue Break Even Quantity x Selling price
To understand the role & purpose of break even analysis

34. Margin of safety Actual production level – break even output
To understand the role & purpose of break even analysis

35. Total Revenue Selling price x Quantity
To understand the role & purpose of break even analysis

36. Total Revenue Selling price x Quantity
To understand the role & purpose of break even analysis

37. Total revenue – Total costs
Profit or loss?
Total revenue – Total costs
To understand the role & purpose of break even analysis