3. Definitions
Breaking even
a business is breaking even when its sales
revenue is sufficient to pay all its costs
Breaking even
a business is breaking even when its sales
revenue is sufficient to pay all its costs
Contribution
the difference between total revenue and
total variable costs. The contribution earned
by a business is used to pay fixed costs
Contribution
the difference between total revenue and
total variable costs. The contribution earned
by a business is used to pay fixed costs
Contribution per unit
the difference between the selling price of
each unit and the variable cost of each unit
Contribution per unit
the difference between the selling price of
each unit and the variable cost of each unit
4. Task 1Task 1
The table in your worksheet shows the contributions
made by four different ‘water features’ produced by a
firm. The total of £971,000 is a contribution towards
fixed costs and profit.
In your table groups look at the contributions made by
each product and:
(i) decide what immediate action should be taken to
improve profit.
(ii) decide which other product should be investigated to
see if its contribution could be improved.
5. Ways of raising
contribution per unit
Raise the selling price
This would raise the revenue
from each level of sales but
might reduce the actual amount
sold
Raise the selling price
This would raise the revenue
from each level of sales but
might reduce the actual amount
sold
Reduce variable costs per unit
Whilst this would raise contribution
it is important to consider what
impact this would have on sales if it
reduced ‘quality’ of the product
Reduce variable costs per unit
Whilst this would raise contribution
it is important to consider what
impact this would have on sales if it
reduced ‘quality’ of the product
6. Break-even output
Definition
the level of output or the number of
customers at which total revenue – total
costs
Definition
the level of output or the number of
customers at which total revenue – total
costs
FormulaFormula
unitperoncontributi
costsfixed
outputeven-break =
7. Task 2Task 2
Calculate the break-even output for the three examples
given on your worksheet.
What can you conclude about the relationship between
the contribution per unit and the break-even output?
8. Break-even charts
Break-even chart
a visual tool which represent the break-
even output but also allow you to show
how much profit is made and which
outputs are profitable and which aren’t
Break-even chart
a visual tool which represent the break-
even output but also allow you to show
how much profit is made and which
outputs are profitable and which aren’t
The margin of safety
the difference between the actual output
produced by a firm and the break-even output
The margin of safety
the difference between the actual output
produced by a firm and the break-even output
9. Example: Memory Mugs
Memory Mugs produces individualised mugs for its
customers
Customers are able to choose the design and lettering
of their mugs
Customers are charged £7.50 per mug
The business’ costs are:
Variable costs (materials, power, labour) = £4.50 per mug
Fixed costs = £300 per month
Memory Mugs can only produce 200 mugs per month
(its capacity)
10. Task 3Task 3
Follow the steps below to create a break-even chart for
Memory Mugs:
Step 1: Draw a line to represent fixed costs (FC)
Step 2: Draw a line to represent variable costs (VC)
Step 3: Draw a line to represent total costs (TC)
Step 4: Draw a line to represent total revenue (TR)
Step 5: Mark on the break-even output
Step 6: Identify the loss making and profitable range of
outputs
Step 7:Mark on your diagram the ‘margin of safety’
assuming Memory Mugs produce and sell 140
11. Task 4Task 4
Using a new diagram, show what would happen if fixed
costs rose to £360 per month
Task 5Task 5
Using a new diagram, show what would happen if the price
of mugs were increased to £8.50 and sales were
unaffected.
12. Task 6Task 6
Using the online breakeven simulator, answer the
questions on your worksheet.
If you are using an iPad you will need to open the
simulator in the Photon app and click on the lightening
icon
Task 7Task 7
You are a business advisor to the stars and have been
approached by Jordan and Peter.
Use your knowledge of costs, revenue, profit and
breakeven to answer their questions.
13. Exit ticket
Open the Socrative app on your iPad (search for
Student)
Login to room number: sdw
Complete the exit ticket
14. Benefits of break-even
analysis
To assess
whether
business is
viable
To assess
whether
business is
viable
Allows ‘best
case’ and ‘worst
case’ scenarios
Allows ‘best
case’ and ‘worst
case’ scenarios
Able to
assess risk
Able to
assess risk
Enables
‘what if?’
analysis
Enables
‘what if?’
analysis
Enables
target
setting
Enables
target
setting
Quick and
easy to
complete
Quick and
easy to
complete
15. Weaknesses of break-even
analysis
Unreliable
information
Unreliable
information
Sales are not likely
to be the same as
output
Sales are not likely
to be the same as
output
‘Fixed’ costs
may not be
fixed
‘Fixed’ costs
may not be
fixed
Variable costs
may change
with output
Variable costs
may change
with output
Price may have
to be reduced
to raise sales
Price may have
to be reduced
to raise sales
