AS Business Studies: Break-even Analysis

Hey, here are some revision notes mainly for people taking the AQA AS Business Studies Unit 1 exam but can be used for other exams too. I hope this helps you to revise! Please rate and comment on how to improve :D ps. scroll down when you open, the top part appears blank but it isnt!

Preview of AS Business Studies: Break-even Analysis

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Break Even Analysis

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Specification
Using Break-Even Analysis to Candidates should understand
Make Decisions how start-up businesses may
· contribution and contribution use contribution and break-
per unit even to analyse the impact of
· calculation of break-even different costs and prices, and
output make decisions on whether to
· construction of break-even start the business.
charts Candidates should be aware of
· analysing the effects of the strengths and weaknesses
changing variables on break- of break-even analysis.
even charts.

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Contribution
Contribution looks at the profit made on individual products
It is used in calculating how many items need to be sold to cover all the business'
total costs (variable and fixed)
Contribution per unit = Selling price of one unit ­ variable costs of one unit
Total contribution can also be calculated as:
Revenue ­ Variable Costs
OR
Contribution per unit x number of units sold
Profit = Total Contribution ­ Fixed Costs
Important things to remember about contribution:
­ It can be increased

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Break Even
A business is said to "break-even" when it is earning enough sales to cover all its
costs.
The break-even point happens when total sales = total costs.

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Calculating Break Even
Three methods of calculating break-even level of output
­ A table (or spreadsheet) showing sales and costs over different levels of
output
­ A formula which you can use to calculate break-even output
­ A graph which charts sales and costs
In order to do break-even analysis, you have to make some important
assumptions
­ Selling price per unit stays the same, regardless of the amount produced
­ Variable costs vary in direct proportion to output ­ i.e.

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Method 1 ­ Using a Table
Variable Fixed Total
Output Sales Profit
Costs Costs Costs
'000 £'000 £'000 £'000 £'000 £'000
0 0 0 40 40 -40
1 10 4 40 44 -34
2 20 8 40 48 -28
3 30 12 40 52 -22
4 40 16 40 56 -16
5 50 20 40 60 -10
6 60 24 40 64 -4
7 70 28 40 68 2
8 80 32 40 72 8
9 90 36 40 76 14
10 100 40 40

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Method 2 ­ Using a
Formula
Contribution per unit = selling price per unit ­ variable cost per unit
Total Contribution = Sales Revenue ­ Variable Costs
Total Contribution ­ Fixed Costs = Profit
Fixed costs (£)
Break-even output (units) = selling price per unit ­ variable cost per unit
(Contribution per unit (£))
Tip: If the information is available, it is always quicker and easier to use a break-
even formula rather than use a table or draw a chart

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Method 3 ­ Break Even
Chart
It is unlikely that you will be asked to complete a break-even chart in BUSS1 (not
enough time!)
However, it is important to understand the concepts used in constructing the chart
100
90 Profit
80
Sales and costs (£'000)
70
60
50 Fixed costs
Loss
40
30
20
10
0
1 2 3 4 5 6 7 8 9 10
Units of Output (`000)

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Margin of Safety
Margin of safety/safety margin = the amount by which demand can fall before a
firm incurs losses i.e.

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Changes to Break
Even/Contribution
The purpose of looking at the effect of changes in assumptions is to understand
what happens to profit as key data in the business changes. This is usually referred
to as "what-if analysis". What-if analysis can be done using any of the three
methods. However, it is much easier and quicker to use the break-even formulae
rather than drawing charts of new tables.

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