Zoom Airlines suspended all flights due to rising fuel costs making it unprofitable to operate. Breakeven analysis is used to calculate the minimum sales or output needed to cover total costs. It involves comparing total revenue to total costs at different output levels. The breakeven point is where total revenue equals total costs, meaning the company makes neither a profit nor loss. Zoom Airlines could no longer breakeven once fuel prices exceeded $140 per barrel based on their cost structure.

1. GCSE
Business Studies
For first teaching from September 2009
For first award in Summer 2011

2. Breakeven Analysis
Learning Outcomes
Breakeven analysis
Breakeven analysis is a technique used by businesses such
as Zoom Airlines to estimate the minimum output they
At the end of this unit students should be need to produce and sell in order to survive in the industry.
able to: To conduct a breakeven analysis, firms need to compare
their sales revenue with their total costs over a range of
• Calculate the margin of safety.
output and calculate the break even point.
• Explain the term breakeven point;
• Distinguish between fixed and variable costs; The breakeven point for a company such as Zoom airlines is
• Calculate the breakeven point both graphically and the point at which it sells exactly the right number of seats
by formula; and other products so that its sales revenue is exactly equal
• Sketch and label a breakeven chart; and to its total cost. At the breakeven point the firm makes
neither a profit nor a loss.
Businesses use breakeven analysis to:
Setting the Scene
• Calculate how many goods they need to sell to make an
acceptable profit.
Zoom Airlines suspend all flights • Calculate the level of costs that can be borne by the
company – Zoom airlines calculated that they could not
Transatlantic budget carrier Zoom Airlines has suspended all
survive if fuel went above $140 per barrel.
flights and is applying to go into administration. Thousands of
passengers due to fly with Zoom have been told to rebook with • Calculate how much they need to charge for their
other carriers, and to contact credit or debit card issuers about goods.
refunds.
• Calculate how changes in price affect their profits and
break even point.
UK-Canadian Zoom blamed its problems on the “horrendous”
price of jet fuel - which had added over £27m to annual fuel
bills - and the economic slowdown.
Calculating the breakeven point
The rising cost of oil - which topped $147 a barrel in July - has
To conduct a breakeven analysis and calculate the
led to aviation fuel bills soaring.
breakeven point a firm must first consider its total revenue,
its fixed costs, its variable costs and its total costs.
“They had based their business model on oil prices of
about $70 or $80,” said Simon Calder, travel editor of The Total Revenue (TR) is the income the firm receives from
Independent. “Once it topped $140 they simply could not selling its products. It is calculated by multiplying the price
survive as they were no longer able to breakeven.” of the product by the quantity sold. For example if Zoom
Airlines sold 1000 seats at £50 each, then its total revenue
Zoom, which began flying in 2001, employed 450 staff in is £50,000. On a graph the total revenue curve would slope
Canada and 260 staff in the UK. It operated flights from upwards from left to right and would start at the origin.
London Gatwick, Glasgow, Manchester, Cardiff and Belfast, as
well as Paris and Rome. Fixed Costs (FC) are those business costs that are not
directly related to the level of production or output. They
are called fixed since they do change as output levels
change. Business rent and rates are examples of fixed costs
since they will have to be paid whether the firm produces
nothing or produces at full capacity. On a graph the fixed
cost curve would be a horizontal line which would start
above the origin.

3. Variable Costs (VC) are costs which vary directly with the Breakeven chart
level of output. If output is zero then variable costs are zero
One way to calculate the breakeven point is to draw a
but as output increases so to do variable costs. An example
breakeven chart. On a breakeven chart the firm will plot its
of a variable cost for Zoom Airlines would be its fuel costs.
total revenue, total cost and fixed cost curves.
The more seats it sells the more fuel is needed to fly the
plane. Other examples of variable costs include workers The diagram below shows a breakeven chart for a typical
wages and electricity charges. On a graph the variable cost firm. The vertical axis shows the total revenue received from
curve is drawn as a straight line sloping upwards from the selling each level of output and the total cost of producing
origin. each level of output. The horizontal axis shows the quantity
of output sold.
Total Cost (TC) is calculated by adding the fixed costs and
the variable costs of the business together. On a graph the TR/TC
total cost curve is a diagonal line which has the same slope
as the variable cost curve, but which starts at the level of
Total
fixed cost and not at the origin. This is because even at zero Revenue
40
output the firm has to pay its fixed costs therefore its total
costs will never fall below its fixed costs. Breakeven Point Profit Total
Cost
The following illustrates how these three cost curves are
shown on a graph. 20
Fixed
Total Costs
Total Revenue Cost Loss
& Total Costs Margin of Safety
Variable Units
Costs 3 6 Sold (#)
40
We can see from the diagram above that the breakeven
point (the point where TR =TC) occurs when the firm sells 3
units.
20 If actual sales are below this breakeven point then the
Fixed firm will be making a loss. If actual sales are above this
Costs
breakeven point then the firm will be making a profit.
Units The actual amount of any profit or loss is shown by the
3 Sold (#)
6 vertical distance between the total cost and total revenue
curves.
Activity: Fixed & Variable
Costs Margin of safety
In the table below indicate which costs are fixed and which The margin of safety is the difference between the current
are variable by placing a tick in the appropriate box. level of output and the breakeven level of output. It
represents the number of units that output can fall by
Cost Fixed Variable before the business makes a loss. In the diagram above if
the actual level of output is 6 units then the margin of safety
Mortgage is 3 units of output.
Rates Calculating the breakeven point by formula
Telephone Another way to calculate the breakeven point is to use the
following formula
Raw materials
Total fixed costs
Electricity
Breakeven point =
Managers’ salaries Contribution Selling price – variable cost per unit
Workers wages For example, let’s assume a producer is selling shoes at £30
per pair. He has total fixed costs of £20,000 and his variable
Interest payments on loans
costs per pair of shoes of £5. To calculate the breakeven
Advertising point we put this information into the above formula.

4. £20,000
Breakeven point =
£25 (£30 - £5) Key Terms
We find that the breakeven point 800 pairs of shoes.
• The breakeven point is the point at which sales
revenue is exactly equal to total cost. At the
Activity: Pete’s Pizza Slices breakeven point the firm makes neither a profit nor a
loss.
Peter Smith has just opened his pizza slice shop in Belfast. • Total Revenue is the income the firm receives from
He wants to calculate how many pizzas he will have to sell selling its products. It is calculated by multiplying the
each month in order to breakeven. He has calculated his price of the product by the quantity sold.
monthly fixed costs to be £2,000 and his variable costs to
• Fixed Costs are those business costs that are not
be £0.20 per pizza slice. Pete sells his pizza slices for £1 per
directly related to the level of production or output.
slice.
Examples include managers salaries and interest
1. Using the information above complete the following payments on loans.
table. The first row is done for you.
• Variable Costs are costs which vary directly with the
Number Total Fixed Variable Total Profit level of output. Examples include workers wages and
of pizza revenue costs costs costs /Loss raw material costs.
slices sold (TR-TC)
• Total Cost is calculated by adding the fixed costs and
0 0 2000 0 2000 -2000
the variable costs of the business together.
500
• The margin of safety is the difference between the
1000 current level of output and the breakeven level of
1500 output.
2000
2500
Revision questions
3000
3500 1. Explain the difference between fixed and variable
costs.
2. Use the information in the table above to plot a
2. Explain what is meant by the breakeven point.
breakeven chart. On this chart you should clearly
label: 3. Give 3 reasons why a firm would conduct a breakeven
analysis.
• The vertical and horizontal axis.
4. Sketch and label a breakeven chart for a typical
• The TR, TC and FC curves.
business.
• The breakeven point.
5. Explain the difference between a profit and a loss.
• The area of profit and loss.
6. Explain what is meant by the margin of safety.
3. Calculate the margin of safety if Pete sells 3,500 pizza
slices each month and put it on the graph.
4. Use the formula given in the notes above to calculate
how the breakeven point and the margin of safety
would change if Pete increased his price to £1.20 per
slice.