1.
UNIT 1: BUSINESS STUDIES
AS REVISION SUMMARY
BREAK – EVEN
TOTAL COSTS
•
•
•
•
•
•
•
TOTAL REVENUE
DEFINITION
USES OF B/E
BASIC CALCULATIONS
CONTRIBUTION
CALCULATING B/E POINT
B/E CHARTS
B/E ANALYSIS & EVALUATION
• EXAMINERS TIPS
NAME: ______________________________
TUTOR GROUP: _____________________
2.
BREAK-EVEN ANALYSIS
DEFINITION:
- The level of output at which business sales provide just enough
revenue to cover all the costs of production.
- At the B/E level of output, a business has made NO PROFIT.
WHY USE BREAK – EVEN ANALYSIS?
1. To help a business decide how much it needs to produce and
sell to make a profit
2. Break – even can illustrate the impact of changes in levels of
production on the profitability of a business
3. Break – even analysis can help support an application for a loan
at the bank.
4. Break – even analysis can be used to compare the profitability
of a range of products.
BASIC CALCULATION: Examples:
a) A furniture shop makes one type of chair that costs £80.
At this price the shop is just breaking even. They are
considering increasing the price of the chair to £96.
Q1 what % has the price increased?
___________________________________________________________
Q2 what profit would the furniture shop make if sold 150 chairs?
___________________________________________________________
___________________________________________________________
3.
CONTRIBUTION
Contribution is the most important factor when calculating B/E
It is essential that you learn the following formula:
TOTAL CONTRIBUTION = TOTAL REVENUE–TOTAL VARIABLE
( TR )
( TVC )
OR
CONTRIBUTION PER UNIT = SP/UNIT – VC/PER UNIT
OR
PROFIT=TOTAL CONTRIBUTION – FIXED COSTS ( FC )
SO….. WHAT ARE FIXED AND VARIABLE COSTS?
Fixed costs (FC)
These will remain the same no matter how much a business decides to
produce. E.g. ___________________________
Variable costs (VC)
These costs can change depending on output levels, e.g.
__________________________________________________________
Once FC’s have been paid, contribution (i.e. revenue – vc) provides a
firm with profit; therefore contribution provides profit to pay for fixed
costs.
REVENUE FROM SALES
LESS
VARIABLE COSTS
GIVES
USED TO PAY
GIVES
PROFIT
4.
CALCULATING THE BREAK-EVEN (B/E) POINT
NEED TO KNOW 3 THINGS:
1. _______________________________
2. _______________________________
3. _______________________________
THE FOLLOWING FORMULA MUST BE KNOWN:
B/E =
FIXED COSTS
CONTRIBUTION (SP – VARIABLE COST)
CALCULATE THE FOLLOWING B/E:
WORKINGS:
1. FC = £120
SP = £10
VC = £2
2. FC = £1000
SP = £200
VC = £50
3. FC = £500
SP = £25
VC = £100
4. FC = £1250
SP = £126
VC = £300
5. FC = £10,000
SP = £255
VC = £775
NOTE: BREAK EVEN IS ALWAYS EXPRESSED IN UNITS, SO
PLEASE DO SO IN THE ABOVE QUESTIONS.
5.
CASE STUDY QUESTION:
Maria owns a successful restaurant in Soho, West London.
Her restaurant has an excellent reputation for serving high
quality meals in the beautiful setting of a Georgian house.
At weekends the restaurant is always turning people away;
and at other times it is unusual for there to be any empty
tables.
Maria is aware she could open another restaurant nearby to
increase the number of customers she could serve each
month. She is aware that she would have to take out a
loan to buy a lease for another property. She has already
looked at a building that would seat up to 30 customers.
Maria plans to be open 25 evenings per month.
Below is an analysis for her new restaurant;
Type of cost / revenue
Average selling price p/ meal
Variable cost per/meal
Ingredients, wages
Associated fixed costs with
opening new premises –
Carpets, furnishing,
crockery, lease of property
Amount
£60
£35
£10,000
a) Calculate the B/E point for Maria and briefly explain the
calculation.
___________________________________________________________
___________________________________________________________
6.
___________________________________________________________
BREAK – EVEN CHARTS
STEP 1: ‘X’ AND ‘Y’ AXIS
It is important to be able to plot and label appropriate axis before
attempting to draw any lines on the chart.
We know both axis meet at zero but how far to they go up and across?
What does the y axis represent?______________________
What does the x axis represent?______________________
The example of Maria’s restaurant can be used to illustrate this point
clearly.
She opens 25 evenings p/month and has 30 customers per night
Therefore maximum customer’s p/month would be:
____________________________________________________
Therefore ‘x’ axis will run 0-_______ meals / customers
Since revenues are usually higher than costs, we calculate the highest
possible revenue figure for the ‘y’ axis.
Maria has a maximum of 750 customers each paying £60 per meal.
Therefore maximum revenue p/month would be:
________________________________________________________
Therefore the ‘y’ axis will run 0-___________ revenue / costs.
LABEL THESE AXIS’ ON THE CHART:
STEP 2: FIXED COSTS
Since we know that FC’s stay the same this line will always be
completely horizontal. FC must always be paid even if Maria has no
customers since they DO NOT vary with output. Therefore:
Lowest possible point = highest possible point
Label this on the chart.
7.
STEP 3: VARIABLE COSTS
VC’S will start at zero since:
Lowest point = no customers = no variable costs
Highest point = maximum customers = maximum variable costs
Show your workings below and plot on the chart
___________________________________________________________
___________________________________________________________
STEP 4: TOTAL COSTS (FIXED COSTS + VARIABLE COSTS)
If;
TC = FC + VC
Lowest point = zero output and zero customers but still have _______
Highest point= max. output and max. customers
Total costs will be parallel to variable costs line.
Show workings and plot on chart:
__________________________________________________________
__________________________________________________________
STEP 5: REVENUE LINE
How much will revenue (sales) will Maria earn?
Lowest point = zero customers
Highest point= maximum customers
Show workings and plot the line on the chart
___________________________________________________________
STEP 6: PLOT THE B/E POINT…
What is the B/E point for the new restaurant? __________________
Does Maria make a profit / loss at this point, explain your answer?
8.
___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
Consider the following by reading the chart you have constructed:
1. Would Maria make a profit or loss if she had: WHY?
- 200 customer’s p/month
- 600 customer’s p/month
The above example represents what is known as the
‘MARGIN OF SAFETY’. What is this?
___________________________________________________________
___________________________________________________________
___________________________________________________________
Margin of safety = max output – b/e point
e.g. 600 – 400 = 200 customers is the margin of safety.
Therefore Maria could afford to lose 200 customers per month before
she would begin to make a loss.
9.
ANALYSIS AND EVALUATION OF BREAK – EVEN
ADVANTAGES OF B/E ANALYSIS:
1. ______________________________________________________
2. ______________________________________________________
3. ______________________________________________________
4. ______________________________________________________
5. ______________________________________________________
DISADVANTAGES OF BREAK-EVEN ANALYSIS:
1. ______________________________________________________
2. ______________________________________________________
3. ______________________________________________________
4. ______________________________________________________
EVALUATION:
Break-even analysis is only as good and accurate as the data on
which it has been based and calculated. If the information is
incorrect, forecasts will be wrong, thus causing problems for a
business.
Also changing trends in tastes, fashions and technology could all
invalidate break-even forecasts, e.g. changes in eating habits
might affect Maria’s revenue sand therefore her break – even
point would change.
10.
BREAK – EVEN CHART: MARIA’S RESTAURANT
READING THE CHART:
B/E POINT =
MARGIN OF SAFETY =
PROFIT AREA
LOSS AREA
11.
SUMMARY OF CONSTRUCTING CHART
1. Label horizontal ‘x’
axis to show all levels of
production. Scale on this
axis should range from:
0-max. output
Don’t forget
to label
both axis
2. Label vertical ‘y’ axis
with values for costs and
revenues. Scale on this axis
should range from:
0-max. revenue
3. Draw the horizontal line to
represent FIXED ASSETS- the
same, no matter what the
output.
You must
label all
the lines on
the chart
5. Add TOTAL COSTS line, by adding:
FC + VC at zero output, this will equal FC
since variable costs are zero at zero output.
Mark this point. Then add together
FC + VC AT max output, mark this point.
Join the two lines together. Line will be
parallel with VC line.
4. Add VARIABLE COSTS. This
line will start at the origin, i.e. zero.
Calculate the max. Variable costs at
max. Output and mark on chart.
Connect these two points.
0-max. Variable costs
Break-even
output occurs
where the
revenue line cuts
the total costs
line
6. Add REVENUE line. This
will begin at origin since
Zero output = zero revenue. Then
calculate, max revenue at max
output. Mark these two pints and
join line.
12.
KEY TERMS:
Break –even chart
Break – even point
Contribution
Fixed costs
Variable costs
Margin of Safety
13.
EXAMINERS TIPS
• IT IS UNLIKELY YOU WOULD HAVE TO PRODUCE AN
EBTIRE CHART, HOWEVER,
• READING DATA FROM A B/E CHART IS V. IMPORTANT
SINCE THERE IS OFTEN LITTLE TIME TO DRAW
ACOMPLATE CHART. YOU MAY HAVE TO READ
-PROFIT/LOSS
-MARGIN OF SAFETY
-B/E POINT ETC
• REMEMBER: Y TO THE SKY = REVENUE / COSTS
X TO THE HORIZON = OUTPUT
• WHEN PLOTTING LINES FIND THE LOWEST POINT AND
THEN THE HIGHEST – JOIN THESE POINTS WITH THE
LINE.
• CONTRIBUTION IS VITAL; TO CALCULATE B/E, MAKE
SURE AND KNOW THIS!!
• MEMORISE SPECIFIC EXAMPLES OF FIXED AND
VARIABLE COSTS, TO HELP EXPLAIN ANSWERS.
• A USEFUL CASE STUDY TO USE TO EXPLAIN YOUR
UNDERSTANDING AND KNOWLEDGE OF B/E WOULD BE
THE ‘CHANNEL TUNNEL’ – (EXTRACT OVER PAGE)
• EXAM SKILLS:
14.
KNOWLDEGE
Knowledge of key terms and definitions
APPLICATION
Applying Formula to do calculations in the question
ANALYSIS
Reading charts, identifying different points and pro’s/cons of B/E
EVALUATION
Deciding how effective B/E is for certain types of business’ and relating
this to marketing.
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