This document provides an introduction to break-even analysis, including definitions of key terms and methods for calculating break-even points. It explains that break-even analysis is used to determine the level of output or sales needed to cover total costs. The document outlines the contribution method and break-even charts as two approaches. It provides examples of calculating break-even points using contribution per unit and defines margin of safety as the difference between current output and the break-even point.

1. Recap

2. Fixed or variable

3. Security

4. Insurance

5. Electric

6. Workers

7. Telephone

8. Raw Materials

9. Accountant

10. Financial management

11. Learning Objectives
Introduction to break-even
Define and calculate contribution
Define and calculate contribution per unit
Identify the relationship between contribution, profit
and pricing
Assess the relationship between break – even and
contribution

12. What is Break - even?
It is the point at which a company is not making a loss
or a profit.
The business income equals its expenditures.
It is a significant marker as it allows management to
know the level of output required to sustain and
succeed.
It can be used to help determine pricing strategy,
budgets, quality and output quantity.
It is where Costs = Revenue within a business.
Always measured in production units never cost

13. Terms to be familiar with
Variable costs = changes depending on output.
Fixed costs (fixed overheads) = remains the same no
mater how much is produced
Total cost = Fixed cost + variable costs
Profit
Loss

14. Terms to be familiar continued
Output
Contribution
Revenue (Sales revenue) = when firms get money
from selling their products / services
Margin of Safety
Break – even point

15. Variable costs
Variable costs correlate to output
This could be the price of ink, or fabric within a T-
shirt factory.
Variable costs can be reduced by reducing waste,
finding cheaper suppliers or streamlining the
production process

16. Fixed costs
Remain the same irrespective of output
Could be
 Rent
 Rates
 Salaries
 Accountancy costs
 Most marketing costs
 Leasing equipment costs

17. Revenue
Revenue is the amount of capital (money) brought in
by the firm form sales of goods or services.
Revenue is calculated before any expenses are
deducted.
If a firm sold 10 T-shirts at £15 within a specific
timeframe (say a month) total revenue for that month
would be £150
Revenue alone is NOTHING to do with profit!!

18. What is Break – even analysis?
It is a technique widely used by production
management and management accountants.
 It is based on categorising production costs between
those which are variable (costs that change when the
production output changes)
 and those that are fixed (costs not directly related to
the volume of production).

19. Calculating the Break – even point
There are two ways to calculate the break-even point.
The two ways are as follows:
The contribution method
Producing a break–even chart

20. Contribution
Essentially the difference between revenue (sales) and
variable costs.
For example if a shirt sells at £25 (revenue) and it
costs £5 for the material and £3 for the ink for the
prints on the shirt the variable costs would be £?. £8
The contribution per unit would be £17
 £25
revenue
-
£8
=
£17
-
V.C.
=
contribution

21. Contribution Method
This involves a two part calculation:
Revenue (selling price) per unit – variable cost per unit =
contribution (towards fixed costs).
AND
Fixed costs / contribution = break-even point.

22. Example
If fixed costs = £2000, variable costs = £8 per unit, selling Price
per unit =£10. Then break-even would be:
Price per unit – variable cost per unit = contribution (towards
fixed costs).
£10 - £8 = £2 (contribution, towards fixed costs)
Fixed costs / contribution = break-even point.
£2000 / 2 = 1000
1000 products will need to be sold in order to break-even
and cover all their costs.

23. Task
Lisa has set 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.
NOW YOU TRY!

24. Task Answer
Lisa has set 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 Tshirt sells for £25.
Revenue per unit – Variable Cost Per Unit = Contribution
£25 - £5 = £20 (Contribution per unit)
Fixed Costs / Contribution per unit = Break-even Point.
£3000 / 20 = 150
Lisa must sell 150 T-shirts to brake even

25. Task 2
Rebecca starts a
business making and selling
handbags and has the following costs:
Fixed Costs
Variable Costs
Selling Price
£50,000 per year
£15 per handbag
£55 each
Calculate the break-even point?

26. Answer


Revenue – Variable Cost = Contribution
£55- £15 = £40 (Contribution)


Fixed Costs / Contribution = Break-even Point.
£50,000 / £40 = 1250
Rebecca has to sell 1250 handbags to brake even.

27. Break – even chart
A break-even chart can demonstrate the effects of
change in price of products / services
Units
produced
Fixed cost
Variable
cost
Total cost
1
15,000
20
15,020
50
15,000
1,000
16,000
100
15,000
2,000
17,000
150
15,000
3,000
18,000
200
15,000
4,000
19,000
250
15,000
5,000
20,000

28. Fixed Cost
T.R.
&
Costs
Production

29. Fixed Cost
T.R.
&
Costs
Production

30. Total Cost
Fixed Cost
T.R.
&
Costs
Production

31. Total Revenue
Total Cost
T.R.
&
Costs
Fixed Cost
Production

32. Total Revenue
Total Cost
T.R.
&
Costs
Fixed Cost
Break - even Point
Production

33. Total Revenue
Total Cost
T.R.
&
Costs
Fixed Cost
Break - even Point
Margin of
safety
Production

34. Area of profit

35. Margin of safety
The margin of safety represents the total current
output and total revenue.
It shows the current level of output at a point on the
total revenue line.
The difference between current output and the
break – even point is the margin of safety.
Businesses need to be aware of the margin of safety as
it shows the extent demand for their products and
services can drop before they start making a loss

36. Start of chart
Start by compiling a simple grid to calculate total
costs at certain quantities of production, plotting your
chart is made a lot easier.
Units
produced
Fixed cost
Variable
cost
Total cost
1
15,000
20
15,020
50
15,000
1,000
16,000
100
15,000
2,000
17,000
150
15,000
3,000
18,000
200
15,000
4,000
19,000
250
15,000
5,000
20,000

37. Task for graph paper
Mark is selling 16GB USB pen sticks on a market
stall. The pen sticks cost him £4.80, he sells them at
£9.00. His market stall rent is £100 on Saturday.
Using the graph paper provided make a break-even
chart to determine how many pen sticks Mark will
have to sell to break-even.
2. Mark has also been offered the same stall on Sunday
at a discounted rate for £60, Using the same chart
1.
calculate how many items he will need to sell to
break-even on Sunday

38. Questions???