Bell Activity - Key Terms

Match the
key term to
the correct
definition.
Bell Activity- Answers
IGCSE Business
Unit 3: Finance

3.3 Costs and Breakeven

THE BIGGER PICTURE
THE BIGGER PICTURE
LEARNING INTENTION

Today we are learning about break-even analysis.

 SUCCESS CRITERIA

ALL students will be able MOST students will be SOME students will be
to EXPLAIN the concept able to INTERPRET able to ASSESS the
of break-even and break-even charts by uses and limitations of
CALCULATE the ANALYSING the break-even for a
break-even level of impacts of changes in business.
output. revenue and costs.
 Starter
The following cost data has been
collected from two shoe manufacturing
companies.
a) Calculate the total annual cost of
manufacturing shoes for both
businesses.
b) Calculate the average cost per unit
(pair of shoes).
c) Identify and explain three reasons
why the average total cost (per unit)
for Company B is lower than for
Company A.
 3.3.2
The concept and calculation
of break-even
 The Concept of Break-even

A business will break-even when its total costs are equal

to its total revenue. This is the break-even point - Where a
business is making neither a profit nor a loss.

BEP = TR = TC

(Total Costs = Fixed Costs + Variable Costs)

 This is the total amount of This is the total amount of
money made by the money spent by the
business selling goods or business – it includes fixed
services. and variable costs.

SALES REVENUE TOTAL COSTS These are the costs that

change when more or less
products are sold.

BREAK-EVEN
VARIABLE COSTS
CHART BREAK-EVEN KEY WORDS

A chart that shows

predicted costs and Can you recall the formulae
revenues, helping
managers calculate the
BREAK-EVEN FIXED COSTS
for:
break even point. POINT
• Variable Costs
• Total Costs
This is the point where the These are the costs that
business’ costs and stay the same, no matter
revenues are equal; the how many products are
business is not making a sold.
Mini Plenary
Mini Plenary - Answers
 Calculating Break-even (Formula)

Break-even = Fixed Costs

Contribution

Contribution = Selling Price - Variable Costs

 Calculating Break-even Task

A shop sells wooden chairs for $35. It has the

following costs:
• Wood per chair - $5
• Glue per chair - $2
• Wages per chair - $7
• Rent - $12,000
• Insurance - $2,000

14,000 = 14,000 = 666.66 or 667 units/chairs

(35 - 14) (21)
Calculating Break-even Task
Calculating Break-even - Answers
Calculating Break-even (Graph)
The break-even point can be shown on a graph. The break-even chart in Figure 28.1
shows total cost and total revenue for Ed Winchester’s business from the earlier
example. Output is measured on the horizontal axis and revenue/costs/profit are
measures on the vertical axis.

What does the break-even chart show?

- The break-even point is where the total cost and total revenue meet or
intersect.
- At any level of output below the break-even point, the business makes a loss.
- At any level of output above the break-even point the business makes a profit.
- The margin of safety refers to the amount of output available to be sold above
the break-even point where he business makes a profit.
- What would Ed Winchester’s margin of safety be if he fits and sells 2000
alarms?
 Complete
Calculating Break-even the table
Calculating Break-even - Answers
 Step 1: Draw the axes
60,00
0
50,00
0
40,00
0
Revenue / 30,00
Costs (£) 0
20,00
0
10,00
0
0 50 10 15 20 25 30
0 0 0 0 0
Quantity
 Why is the fixed
Step 2: Plot the fixed costs costs line a straight
line?

60,00
0
50,00
0
40,00
Revenue / 0
Costs (£)
30,00
0
20,00
0
10,00 FC
0
0 50 10 15 20 25 30
0 0 0 0 0
Quantity
 Why does the total
Step 3: Plot the Total Costs costs line start at
£12,000 and not £0?

60,00
0
50,00 TC
0
40,00
0
30,00
0
Revenue / 20,00
Costs (£) 0
FC
10,00
0
0 50 10 15 20 25 30
0 0 0 0 0
Quantity
 Why does the Total
Step 4: Plot the Total Revenue line Revenue line start at
£0?

60,00
0
TR
50,00
0 TC
40,00
0
Revenue / 30,00
Costs (£) 0
20,00
0 FC
10,00
0
0 50 10 15 20 25 30
0 0 0 0 0
Quantity
Step 5: Plot the break-even point
Step 7: Shade the profit and loss sections on your chart
Step 8: Interpret your break-even chart
A. Break-even is the point where TC = TR
B. Break-even is the point where the business makes
neither a profit nor a loss
C. The break-even point of the product is 200 units
D. The business needs to sell more than 200 units to
cover all of its costs
E. If the business makes and sells more than 200 units
it will start to make a profit
What happens if the business fails to make and sell 200
units?
 Individual Task - Homer’s Break-even

Things you will need:

• Pencil
• Coloured pencils to draw each of
the cost/revenue lines Stretch & Challenge – Answer the WHAT IF questions in
your copy book.
• Ruler
• Graph Paper 1) WHAT IF, there was an increase in wages at Homer’s
snack business? What would happen to the break-even
Task - Complete the table to point?
calculate Homer Simpson’s
break-even and populate a 2) WHAT IF, Homer has found a new supplier which has
break-even chart for his new resulted in a decrease in variable costs? What would
business venture. happen to the break-even point?
Individual Task - Answers
Margin of Safety (MOS)

Express your answer in number of units

 Margin of Safety (MOS)
● This is the difference between the
break-even point and the current sales.
● If Yousef sells 150 cakes in his bakery
and his current break-even level is 100
then the margin of safety would be:

150 – 100 = 50 cakes

 Break-even Chart and Margin of Safety
Break-even TR
Point Profit
Total
Costs/
Revenue TC
Loss
£

FC
Margin of Safety
150-100= 50

50 100 150
Units Units Units
Quantity
Case Study - Interpreting Break-even Charts
 ‘What If’ Scenarios
Discuss with the person next to you and write down in your class notebook, what would
happen to the break-even point for a business if...

•There was an increase in wages.

•There was an increase in sales.

•A new supplier has resulted in a decrease in variable costs.

•Premises rates increase resulting in increased fixed costs.

Uses of Break-even
 Limitations of Break-even
• The total costs and total revenue lines are shown as straight lines. In practice, they may not
be straight lines. For example, a business may have to offer discounts on large orders so
total revenues fall at high outputs. In this case, the total revenue line would rise and then
eventually fall. A business can lower costs from bulk buying so costs may fall at high
outputs and total costs would be curved.
• It is assumed that all output is sold and no stocks are held. Many businesses hold stocks of
finished goods to be able to cope with changes in demand. There are also times when firms
cannot sell what they produce.
• The accuracy of a break-even chart depends on the quality and accuracy of the data used to
construct the total cost and total revenue lines.
Exam Practice - Analyse (Paper 1)
Exam Practice - (Mark Scheme)
Exam Practice - Calculate (Paper 2)
Exam Practice (Mark Scheme)
Exam Practice - Analyse (Paper 2)
Exam Practice - (Mark Scheme)
Plenary
 REVIEW OF LI/SC

ALL students will be able MOST students will be SOME students will be
to EXPLAIN the concept able to INTERPRET able to ASSESS the
of break-even and break-even charts by uses and limitations of
CALCULATE break-even ANALYSING the break-even for a
level of output. impacts of changes in business.
revenue and costs.

Today we are learning about break-even analysis.