Edexcel AS Business

2.2.3 Break-even
 Theme 2 Retrieval Challenge Matrix
1 point 2 points 3 points
Define the term Describe how to calculate Explain sources of finance
‘consumer trend’ fixed costs appropriate for a limited
liability company
What is a ‘business plan’? Describe how to calculate Explain what economic
variable costs variables might affect
sales forecasts
How does a ‘grant’ work? Describe how to calculate Explain difficulties of sales
sales volume forecasting
Calculators will be needed for this topic
A ruler and coloured pens are needed for this
topic
You will need worksheet 2.2.3 for this lesson
From Edexcel
a) Contribution: selling price – variable cost per unit
b) Break-even point:
• total fixed costs + total variable costs = total revenue
c) Using contribution to calculate the break-even point
d) Margin of safety
e) Interpretation of break-even charts
f) Limitations of break-even analysis
Starter
• You have bought some FunkoPops from Alibaba wholesale. They will
cost you £5.26 each, but you have to buy 100. You can sell them for
£10each. How many do you have to sell at £10 each to break even?
Starter
• You have bought some FunkoPops from Alibaba wholesale.
They will cost you £5.26 each, but you have to buy 100. You
can sell them for £10each. How many do you have to sell at
£10 each to break even?

• 100 x £5.26 = investment of £526

• At a selling price of £10 you need to sell 52.6 FunkoPops
• But you can’t sell 0.6 of a product so round up, you need to
sell 53 to break-even
• This means you can still sell 47 to make a profit…
Definition of Break-even
• The point at which revenue equals cost so the business is making neither a
profit nor a loss

Break-even is TR=TC
• Where:
• TR is total revenue
• TC is total costs, which is fixed and variable costs added together

• Note: break-even is expressed as an amount of output NOT a money value

e.g. 250 units
Break-even explained
• When a business starts up, the owner
may invest their money in; equipment,
fixtures, fitting or machinery
• At the start of the business there will
be little or no revenue, and lots of
costs
• The business will start to trade and
then better revenue levels can be
made
• The business will need to know at
what point they break-even and cover Putting in fittings in a shop, can you
their costs explain where are the costs and
where the revenue will come from?
 Break-even
This is the point at which the business
makes neither a loss nor a profit
Contribution
Contribution formula

C = SP – VC
Where:
C is contribution
SP is selling price per item
VC is variable cost per item

Express your answers in £ pounds

Contribution calculation examples
1. You sell cricket bats for £25, they
cost £14 to make
2. You sell sea shells down on the sea
shore for £10 a bag and they cost £3
to put together
3. You sell red and yellow lorries for £5
each in your shop and they cost £1
to import from China
Contribution calculation examples
1. You sell cricket bats for £25, they £25 – £14 = £11
cost £14 to make
2. You sell sea shells down on the sea
shore for £10 a bag and they cost £3
£10 – £3 = £7
to put together
3. You sell red and yellow lorries for £5
each in your shop and they cost £1
£5 – £1 = £4
to import from China
Using contribution to calculate the
break-even point
Full break-even formula

FC
C
• Where FC are the fixed costs of a business (e.g. rent etc.)
• Where C is contribution (SP -VC)

Express your answers in number of units

Break-even calculation examples
1. You sell cricket bats for £25, they cost
£14 to make, fixed costs are £500
2. You sell sea shells down on the sea
shore for £10 a bag and they cost £3 to
put together, fixed costs are £1,000
3. You sell red and yellow lorries for £5
each in your shop and they cost £1 to
import from China, fixed costs are £750
Break-even calculation examples
1. You sell cricket bats for £25, they cost FC £500/ C £11
£14 to make, fixed costs are £500 B/E = 46 cricket bats

2. You sell sea shells down on the sea

shore for £10 a bag and they cost £3 to FC £1,000 / C £7
put together, fixed costs are £1,000 B/E = 143 Sea shells

3. You sell red and yellow lorries for £5

each in your shop and they cost £1 to
import from China, fixed costs are £750 FC £750 / C £4
B/E = 188 lorries

Express your answers in number of units and round up to whole units

Break-even calculation example
• Lucy sets up a business to print
panda t-shirts. The fixed costs
are £3000. The variable costs per
t-shirt (the t-shirt, ink, wages)
are £5. Each printed t-shirt sells
for £25.

• Calculate how many t-shirts Lucy

needs to sell to break-even
• The t-shirt was from this site

Express your answer in number of units

Break-even calculation answer
1) First calculate contribution (C) SP – VC

• £25 - £5 = £20

• 2) Now use contribution in full formula FC / C

• £3,000 / £20 = 150

• Lucy needs to sell 150 panda t-shirts to break-even and cover all her costs, this
will be useful when she is working out how many t-shirts to make
Interpretation of break-even charts
Break-even charts
• In an exam you may be asked to
interpret a break-even chart

• To help you to be able to

interpret break-even charts, it
will be useful for you to practice
drawing a chart, so that you
know how they are constructed
Start by completing this table of data from which you can plot a graph

Number of Total revenue Fixed costs Variable Total Costs

sales (units) (£) (£) costs (£) (£)
(sales x (sales x Variable
£180) £120) costs Plus
Fixed costs

50 9000 12000 6000 18000

100 12000
150 12000
200
250
300
Selling price = £180 per unit
Variable cost = £120 per unit
 Your completed table should look like this
Number of Total revenue Fixed costs (£) Variable costs Total Costs (£)
sales (units) (£) (£) Variable costs
(sales x £180) (sales x £120) Plus Fixed
costs

50 9000 12000 6000 18000

100 18000 12000 12000 24000

150 27000 12000 18000 30000

200 36000 12000 24000 36000

250 45000 12000 30000 42000

300 54000 12000 36000 48000

 Step 1 draw the axes
60,000

50,000

40,000

£ 30,000

20,000

10,000
0 50 100 150 200 250 300

Quantity
 Why is the fixed
Step 2: Plot the fixed costs costs line a straight
line?

60,000

50,000

40,000

£ 30,000

20,000

FC
10,000
0 50 100 150 200 250 300

Quantity
 Why does the total
Step 3: Plot the Total Costs costs line start at
£12,000 and not £0?

60,000

50,000 TC

40,000

£ 30,000

20,000
FC
10,000
0 50 100 150 200 250 300

Quantity
 Why does the Total
Step 4: Plot the Total Revenue line Revenue line start at
£0?

60,000
TR
50,000
TC
40,000

30,000
£
20,000
FC
10,000

0 50 100 150 200 250 300

Quantity
Step 5: Plot the break-even point

B/E
Step 6: Check your chart with your table Why does this
represent break-
even?

Number of Total revenue Fixed costs Variable costs Total Costs

sales (units) (£) (£) (£) (£)
(sales x £180) (sales x £120) Variable
costs Plus
Fixed costs
50 9000 12000 6000 18000
100 18000 12000 12000 24000
150 27000 12000 18000 30000
200 36000 12000 24000 36000
250 45000 12000 30000 42000
300 54000 12000 36000 48000

Total revenue Total costs are

is £36,000 £36,000
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 products
to cover all of its costs
Margin of safety
 Margin of safety formula

Actual sales minus break-even level of sales

Express your answer in number of units

Margin of safety
• This is the difference between the break-
even point and the current sales.
• If Buddy sells 150 cakes in his bakery and
his current break-even level is 100 then
the margin of safety would be:

Actual sales – Break-even level of sales =

Margin of safety
• 150 – 100 = 50 cakes
What does margin of safety show?
• The margin of safety calculation shows the
number of sales that could be lost before
the business makes a loss

• For example Buddy could have 50 cakes go

stale before he makes a loss in his bakery

• Let’s see how that is calculated

Margin of safety
• This is the difference between the
break-even point and the current sales.
• If Buddy sells 250 cakes in his bakery
and his current break-even level is 200
then the margin of safety would be:

Actual sales – Break-even level of sales

= Margin of safety
• 250 – 200 = 50 cakes
Try the sample margin of safety chart
question on the right
Limitations of break-even analysis
Uses of break-even

Used as a “what
if?” tool to work
out what happens
if prices or costs
go up Used by business
to write their
business plan

Used by a
business that is
starting up to
work out when
they will stop
making a loss
Limitations of break-even

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Plenary Quiz
Write out a short definition for each of these 7 terms:

1. Revenue (turnover)
2. Break-even
3. Variable costs
4. Fixed costs
5. Contribution
6. Margin of safety
 Sample AS questions
AS exam questions on Paper 1
Marketing and People have the
following tariffs:
2 marks
4 marks
8 marks
10 marks
20 marks
Case Study for sample question 1
Sample question 1

Knowledge 1 Application 3
Case Study for sample question 2
Sample question 2

Knowledge 1 Application 3
Sample question 3

Knowledge 2 Application 2 Analysis 2 Evaluation 2

Peer / self marking grid for 8 mark question
Mark
1-2 marks Limited knowledge and some recall of business theory, answer may not be in context
What went well: You used business terms correctly
Even better if: You had discussed the business situation in the case study
3-5 marks Comments are in context, and chains of reason are present but very basic. Unbalanced
argument, only discusses one side.
What went well: You were able to give chains of reason in context in your answer
Even better if: You had given both sides of the argument
6-8 marks Chains of reason are complete and argument shows both sides. Answer is in context and
uses numerical data to support where appropriate.
What went well: You gave a balanced argument in your answer
Even better if: You had used more numerical data to support your arguments
Sample question 4

Knowledge 2
Peer / self marking grid for 2 mark essay
question
Mark
Knowledge 2 Giving a correct definition, award 1 mark
Adding some development, extra information, or an example, award 1 mark
Max 2 marks

Examples of peer review comments:

What went well: You gave a correct business definition
Even better if: You had developed your point, or given an example
Sample question 5 extract
Sample question 5

Knowledge 4 Application 4 Analysis 6 Evaluation 6

 Peer / self marking grid for 20 mark question
Mark
1-4 marks Limited knowledge and some recall of business theory, answer may not be in context
What went well: You used business terms correctly
Even better if: You had discussed the business context given in the case study
5-8 marks Comments are in context, and chains of reason are present but very basic. Unbalanced
argument, only discusses one side.
What went well: You were able to give chains of reason in context in your answer
Even better if: You had given both sides of the argument
9-14 marks Chains of reason are complete and argument shows both sides. Answer is in context, and
comparisons between the two options will have been attempted, which may lead to a
conclusion
What went well: Your analysis was shown in your chains of reason
Even better if: You had given a recommendation or proposed a solution
15-20 marks Accurate understanding and knowledge. Logical chains of reason, balanced and fully
developed arguments weighing up both sides of each options. All in context leading to a
supported judgement, and a conclusion that proposes a solution or recommendation
What went well: You had logical chains of reason showing cause and effect which led to a
supported judgement and recommendation
Even better if: You had used more comparative arguments to support your recommended
solution
Glossary - test
1. Revenue (turnover)
2. Break-even
3. Variable costs
4. Fixed costs
5. Contribution
6. Margin of safety
7. Overheads
8. Direct costs
9. Indirect costs
Revision Video 2
Thank You