1. 1 Calculating a break-even point Calculate the break-even quantity, profit and margin of safety Use these methods to analyse the effects of changes in price or cost on break-even, profit and margin of safety HL Calculate the required output level for a given target revenue or profit HL Analyse the assumptions and limitations of break-even analysis HL

2. 2 Keywords – recap last section  Fixed cost  Variable cost  Start up costs  Running Costs  Profit  Total cost  Semi-variable cost  Unit  Revenue

3. 3 The basics of break-even analysis  Businesses must make a profit to survive  To make a profit, income must be higher than expenditure (or costs) Income$50,000 Costs $40,000 Profit $10,000 Income$50,000 Costs $60,000 Loss $10,000

4. 4 The break-even point  Variable + fixed costs = total costs  When total costs = sales revenue, this is called the break-even point, eg total costs = $5,000 total sales revenue = $5,000  At this point the business isn’t making a profit or a loss – it is simply breaking even.

5. 5 Using a formula to calculate the break- even point The break-even point = Fixed costs (Selling price per unit minus variable cost per unit) Contribution

6. 6 Applying the formula Fixed costs (Selling price per unit minus variable cost per unit) Tom: $100 ($1.50 – 50p) =100

7. 7 Activity: 3.2.1 – draw the breakeven graph

8. 8 Margin of safety  Producing more than the breakeven point.  It is useful to know how much sales can fall before loss is being made.  Pg 337

9. 9 Margin of safety  Producing more than the breakeven point.  It is useful to know how much sales can fall before loss is being made.

10. 10 Breakeven test - 2

11. 11 Identifying the break-even point Loss Profit Break-even point

12. 12 Contribution:  It can be increased by increasing selling revenue  It can be increased by reducing variable costs per unit  It is not the same as profit (fixed costs haven’t been subtracted)  An increase in contribution per unit raises the potential profit

13. 13 Strengths and weakness of breakeven analysis – HL (pg 339)  Hwk produce a spider diagram of Strengths and weaknesses.

14. 14 Calculating a break-even point Lesson Objective: Show the effects of changing costs and prices on contribution per unit, breakeven charts and the breakeven level.

15. 15 Recap  Define:  Start up costs  Running Costs  Fixed cost  Variable cost  Revenue  Contribution

16. 16 Strengths and weakness of breakeven analysis - HL  Strengths  Weakness

17. 17 Changes in variables  Change in price  Changes in fixed costs  Changes in variable costs.

18. 18 Changes in variables  Change in price  Changes in fixed costs  Changes in variable costs.

19. 19 Other uses of a Breakeven graph:  Target rate of profit – calculate the amount of output needed to generate a certain amount of profit.

20. 20 Further uses of a Breakeven graph (HL) pg 338  Breakeven – price  May want to know how much to charge for its product to break- even.  To do this a business must know how much it is going to product to sell.

21. 21 Other uses of a Breakeven graph:  Price needed to reach a target rate of profit.

22. Target Revenue & Profit  Pg 339 22

23. Break-Even Revenue  Pg 339 23

24. 24 What is the Breakeven point? Define……. Do use the term in your answer as it helps you to focus….. In a question HIGHLIGHT key words and any answers. It is QUALITY not Quantity.

25. Break-even and the Dome 3.2 25

26. 26 1. What is mean by Breakeven? (2)  Answers may include: When the level of input equals the level of output.  C2 Ap 3 An3  Content  2 marks Good understanding  1 mark Some understanding  0 marks No relevant content points made.

27. 27 2. Examine two ways to reduce the breakeven point.(8)  Answers may include: Cut costs (fixed/variable) - but must consider effect on quality Increase selling price – but consider effect on sales!  C2 An3 En3  Content  2 marks Two or more points made and explained  1 mark Relevant content made but not developed or one point made and explained  0 marks No relevant content points made.  Analysis  3 marks Good analysis of issues  2 – 1 mark Limited analysis of issues  0 marks No analysis of issues demonstrated  Evaluate  3 marks Good judgement of relevant issues  2-1 marks Limited judgement shown of relevant issues  0 marks No judgement of relevant issues. C□An□E□

28. 28 3. Discus the limitations of using Breakeven analysis (12)  Answers may include: simplistic e.g all units sold at one price); data may be out of date/ assumes what is made is sold; does not take into account competition e.g price cut; doesn’t consider economy of scale; prices always changing (won’t stay valid for long);accuracy of data.  C2 Ap 2 An4 E 4  Content  2 marks Two or more points made and explained  1 mark Relevant content made but not developed or one point made and explained  0 marks No relevant content points made.  Application  2 marks Points effectively applied to the case  1 mark An attempt to apply knowledge to the case  0 marks No attempt at application  Analysis  4 – 3 marks Good analysis of issues  2 – 1 mark Limited analysis of issues  0 marks No analysis of issues demonstrated  Evaluate  4 - 3 marks Good judgement of relevant issues  2-1 marks Limited judgement shown of relevant issues  0 marks No judgement of relevant issues.C□Ap□An□E□

29. 29 2. Two actions to take to reach the original target of 12 million customers per year.(6)  Answers may include: increase promotion to boost sales (two for one); Increase advertising; better public relations.  C2 Ap 2 An2  Content  2 marks Two or more points made and explained  1 mark Relevant content made but not developed or one point made and explained  0 marks No relevant content points made.  Application  2 marks Points effectively applied to the case  1 mark An attempt to apply knowledge to the case  0 marks No attempt at application  Analysis  2 marks Good analysis of issues  1 mark Limited analysis of issues  0 marks No analysis of issues demonstrated C□Ap□An□

30. 30 What do you need to improve?