Break-even Revenue Level
AS Economics and Business
Unit 1
Lesson Objectives
• To be able to identify the contribution from a potential
range of products and services
• To be able to identify break-even revenue
• To assess if the break-even revenue level is achievable
• To be able to identify a desired margin of safety
• To be able to answer some past paper questions based
on the topic
Starter
• If you had 100 Christmas trees to sell and each
one cost you £2.00 to buy, you decide to sell
them at £5. Which tree will be the first one
that is pure profit when sold?
Definition of Break-even
• The point at which revenue equals cost so
your business is making neither a profit nor a
loss
• Note: break-even is expressed as an amount
of output NOT a money value
Get yer calculators out!
Break-even calculations
• First we need to know the contribution that
selling the item makes towards the profit.
• We calculate contribution;
• C= SP – VC
• Where SP is selling price per item and VC is
variable cost per item
Contribution calculation practise
1. You sell cricket bats for £25, they cost £14 to
make
2. You sell sea shells down on the sea shore for
£10 a bag and they cost £3 to put together
3. You sell red and yellow lorries for £5 each in
your shop and they cost £1 to import from
China
Full break-even formula
• Break even point can be found when:
FC
____
C
Where FC is fixed costs of a business (rent etc)
Where C is contribution (SP-VC)
Break-even calculation practise
• Lucy 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.
• How many t-shirts does Lucy need to sell to
break-even?
Margin of safety
• This is the difference between the break-even
point and the current level of output.
• If Buddy produces 100 cakes in his bakery and
his current break-even level is 25 then the
margin of safety would be:
•
Production – Breakeven = Margin of safety
• 100 – 25 = 75 cakes
Glossary – quick test
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Revenue (turnover)
Break-even
Variable costs
Fixed costs
Contribution
Margin of safety
Overheads
Direct costs
Indirect costs
(answers in notes section of slide show – press escape
button on keyboard to view)
Break-even diagram
Breakeven
Point
Total
Revenue
Total
Costs/
Revenue
£
Total
Costs
Loss
Profit
50
Units
100
Units
Quantity
150
Units
Break-even diagram with margin of safety
Total
Costs/
Revenue
Breakeven
Point
Total
Revenue
Profit
Total
Costs
Loss
£
Margin of Safety
150-100= 50
50
Units
100
Units
Quantity
150
Units
Sample question 1
Answer question 1
Answer 250 B
Explain your answer (show your workings)
- Break-even is fixed costs/contribution OR breakeven occurs
when total revenue equals total costs
(1 mark)
- Which is 12,500 / 50 (2 marks; 1 mark per applied part of
equation)
Any acceptable answer which shows selective
knowledge/application and/or development
NB Up to 2 additional marks for part (b) if part (a) is
incorrect.
Sample question 2
In his attempts to persuade the Dragons to
finance his business venture, it might
have been useful for Levi to have prepared
break-even analysis for Reggae Reggae
Sauce.
Assess the likely value of break-even analysis to
Levi Roots.
[8]
Answer question 2
Sample question 3
Adonis Dascalakis, the Head Chef at Aroma Italia Pizzeria, has
calculated that he needs to prepare 60 meals a day at an average price
of £12 per customer in order to break even. Fixed costs work out at
approximately £120 per day.
Which of the following is the average variable cost per meal for Aroma
Italia Pizzeria at the break-even level of output?
A £10
B £4
C £8
D £2
[4]
Answer question 3
Which of the following is the average variable cost per meal for
Aroma Italia at the break-even level of output?
Answer – £10 (A) 1
Explain your answer (show all your workings)
- Defines average variable cost or break-even OR
Uses a correct formula, e.g. FC/Output = contribution OR
(total revenue – FC)/output = variable cost OR
break-even = FC/contribution OR selling price – contribution
= average variable cost (1 mark)
(Knowledge must be shown for 1 mark)
- Applies data, i.e. 120/60 = 2 (1 mark application), then
12-2/? = 10 (1 mark application)
- Or 720-120=600/60=10 (2 marks)
NB DO NOT accept 120/12=10 (not strictly applied)
Sample question 4
Sandwell Sheds Ltd has fixed costs of £1000 per month and it
sells sheds at an average price of £200. Average variable costs
per shed are £160.
What is Sandwell Sheds Ltd’s break-even level of output per
month?
A 25 sheds
B 50 sheds
C 250 sheds
D 800 sheds
[4]
Answer question 4
Answer is A 25 sheds
- Definition of break even/formula, e.g.
FC/Contribution (1 mark)
- Insert partial data, e.g. FC = 1000/? (1 mark)
- Complete data in the formula, i.e. 1000/40
(1 mark)
Any acceptable answer which shows selective
knowledge/application and/or development
NB up to 2 marks out of 3 may be gained for part
(b) if part (a) is incorrect.
Sample question 5
Answer question 5
Correct answer was D = 400
- Definition of margin of safety (1)
- Defines break even (1)
- At 900 units the business is operating at 400 units
above break even (500) (1)
- Therefore the Margin of Safety is 400; 900-500 (1)
Any acceptable answer which shows selective
knowledge/application and/or development
NB up to 2 marks out of 3 may be gained for part
(b) if part (a) is incorrect.
Revision Video