GCE APPLIED BUSINESS
UNIT 3 FINANCIAL
PLANNING AND MONITORING
Break Even
D. Wood 2015
Booklet Aims
By the end of this booklet you should be able to:
For an E/D grade
 Identify how a business breaks even
 Make simple break even calculations
 Identify effects of changes in variables which affect break even
 List/Describe reasons for the importance of break even
For an C/D
 Explain how a business breaks even using different methods
 Make complex break even calculations
 Analyse reasons for changes in break even
 Analyse reasons for the importance of breakeven
For an A/B grade




Analyse different methods of breaking even
Make complicated break even calculations
Evaluate reasons for changes in break even
Evaluate reasons for the importance of break even
Starter Exercise
Mix N Match definitions
1. Cost
A.Fixed Costs + variable costs
2. Fixed Cost
B.Total costs are greater than total revenue
3. Variable Cost
C.Amount incurred by a business as a result
of trading
4. Total Cost
D.Total sales are greater than total costs
5. Price
E.Point at which total costs equal total
revenue
6. Revenue
F.Costs that do not vary with the level of
output – e.g. rent, salaries)
7. Profit
G.Total amount of income a business
receives in a period of time
8. Loss
H.The amount of money given in payment
for something
I.Costs that vary directly in proportion to
output (e.g. materials, pay related to amounts
produced or sold.
9. Break Even
Break Even – The Chart Method
If you are running a business you will want to know how it is going to perform. Breakeven is
a technique for working out a point of production or the number of sales where the company
will break even. Study and complete the following exercise
In our example Fixed Cost = £2,000, Variable Costs = £2.00 per unit and Selling Price = £4.00
per unit.
UnitsOf
Output
000
200
400
600
800
1000
1200
1400
1600
Fixed
Costs
Variable
Costs per
unit.
Total
Costs
Sales
Income
per unit
Profit/Loss
Margin of Safety
In the squared area draw a graph of this clearly labelling both axis X and Y, all lines, clearly
indicate the area of profit and of loss and indicate the breakeven point.
Now check you have labelled your chart properly
http://www.businessstudiesonline.co.uk/GcseBusiness/Activities/Module5/BreakEven/Break
EvenChart/Break%20Even%20Chart.html
Break Even – The Formula
Contribution
The Basic Concept
I have just setup a shop that sells cricket bats. If I buy a cricket bat from my suppliers for
£100 and sell it for £200, how much profit have I made? You may at first think £100.
However, this £100 isn’t profit. It is contribution. This £100 merely contributes towards
paying off my fixed costs. Once my fixed costs have been met, then this £100 contributes
towards my profit.
Eating away at the profit of EACH product sold are fixed and variable costs. Each product
will have its share of variable costs associated with it. Each product must also make a
contribution to pay off the fixed costs. How many products have to make a contribution
before the fixed costs are covered?
This is determined by :- The size of the price
- The size of the variable cost
So, if there is a high price and low variable cost, each product sold will make a large
contribution and fixed costs will be soon paid off
This is expressed as :
Contribution per unit = Sales Price per unit – variable cost per unit
e.g If a product that sells for £200.00 has an associated £100.00 variable cost, it can
contribute £100.00 towards covering fixed costs.
To put this another way, if the FIXED costs are £600, then it will require only the first 6
products to be sold (ie at £100.00 each) to cover the fixed costs. There after all sales will
contribute to the firms profits !!!
Contribution Exercises
1.Microwaves are sold at £150.00 each the variable costs are £55.00.
What is the contribution made to fixed costs for each one sold?
2. If the fixed costs in producing them is £95000, how many must be sold to cover the fixed
costs?
3. Nintendo Wii’s are sold for £450.00 each the variable costs are £75.00. What is the
contribution made to fixed costs for each one sold ?
4. If the fixed costs in producing them is £375,000.00 how many must be sold to cover the
fixed costs?
Break Even
To determine the break-even point
Break-even Point = Total Fixed Costs
Contribution per unit
So, if you knew that your fixed costs were £600 and that your contribution per unit was £6.00
£600 = 100 Units
£6.00
( The number of units ~ products~ you would have to sell before you covered your costs).
Breakeven =
Calculate
Harry sets up a business to print T-shirts. The total fixed costs of the premises and the Tshirt
printers are £3000. The variable costs per T-shirt ( The t-shirt, ink, wages) are £5. If each
printed T-shirt sells for £25.
1) The contribution per unit
2) The Break-even point (i.e. how many T-shirts Harry has to sell to cover his costs)
Alison and Martin are the owners of a business called Playtime, a small manufacturing
business. They make a children’s toy called “Constructo”. This toy consists of a set of
wooden blocks of various shapes and colours that is old in an attractive box. The wooden
blocks can be used to make simple buildings. Alison and Martin have estimated the following
costs of making the toy:
Variable costs £12 per toy; Fixed costs £600 per month;
Calculate
1.Contribution per unit
2. Break Even Point
The toy is sold for £18.
A)
Fixed costs
Variable costs per
unit
Selling price per unit
1600
15
25
B)
Fixed costs
Variable costs per
unit
Selling price per unit
1800
13
25
C)
Fixed costs
Variable costs per
unit
Selling price per unit
1620
15
30
D)
Fixed costs
Variable costs per
unit
Selling price per unit
1200
19
25
E)
Fixed costs
Variable costs per
unit
Selling price per unit
1600
15
35
F)
Fixed costs
Variable costs per
unit
Selling price per unit
1750
11
25
Plenary:
http://www.businessstudiesonline.co.uk/GcseBusiness/Activities/Module5/BreakEven/BreakEvenTe
rmsDragDrop/frame.htm
Changes to Break Even
Go to the following link
http://www.tutor2u.net/blog/index.php/business-studies/comments/free-teaching-resourcebreak-even-simulator
Now try the following – ALWAYS RETURN TO YOUR ORIGINAL STARTING
FIGURES
What will be the effects of each of the following changes – HIGHER or LOWER
Change
Effect on Contribution
Effect of Break Even
Output/Sales
Higher selling price -£25
Lower selling price -£15
Higher variable Cost - £12
Lower variable Cost -£6
Increase Fixed costs -£6,000
Decrease Fixed Costs -£5000
Extension Work
Use the following link and answer the questions on the worksheet
Break Even – Jordan & Peter Andre
JordanandPeter.pdf
http://www.tutor2u.net/assets/Breakeven-
Plenary
http://www.tutor2u.net/business/quizzes/as/revenues_costs_breakeven/quizmaker.htm
Evaluating The Usefulness of Break Even
Strengths
Easy to work out a target
Good indicator/ prediction – helps managers
set aims and how long to reach a profit
Can work out if the business is viable and the
amount of risk involved.
Helps you to modify targets
Weaknesses
Too simple – makes assumptions which are
not always true e.g prices can change with
output
Sales and output are not going to be the
same. You may not sell everything you
make.
Costs change – fixed costs do change with
output and variable costs
PEST factors not taken account of
Businesses frequently sell more than one
product, which make it difficult to calculate
Break even is a planning tool which give a business a general idea of a target, but shouldn’t be relied
on to make decisions as there are too many variables which affect it.
Homework
June 2014 Q 2(a) & 2(c)
Do you think that the use of break even analysis would help Jem to manage his business more
effectively? Use Item A to justify your view. (10 marks)
Write a plan of how you would tackle this question. Analysis -0-6 marks Evaluation 0-4 marks
Want to find out more about the skills required in an exam:
http://www.businessstudiesonline.co.uk/Apps/ExamTechnique.pdf
In your Conclusion: At the end of longer questions, the examiner is hoping that you will provide
a judgement. There’s rarely a straightforward ‘correct’ answer to these questions. Instead,
you’re being tested on your ability to say “hmmmm ..... well the answer depends on this and
this. But if such-and such were true, I might change my answer”.
1.Make your Judgement - by weighing up the relative significance of each point you make in
argument. In other words – compare the importance of each point to the business in the case
study.
2.Justify your judgement by providing evidence that you have prioritised the most significant
reason for the business
3.Identify the “Depends On” factors that the business needs to consider
Help Box: Still Unsure. Try the following links.
https://www.youtube.com/watch?v=it_6ASXODwk
http://www.bized.co.uk/virtual/bank/business/planning/financial/step1.htm
http://www.tutor2u.net/blog/index.php/business-studies/comments/revision-presentationbreakeven-analysis-introduction