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!

HideShow resource information
  • Created by: I P B
  • Created on: 18-11-10 11:56

Pages in this set

Page 1

Preview of page 1
Break Even Analysis

Page 2

Preview of page 2

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…

Page 3

Preview of page 3
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…

Page 4

Preview of page 4
Break Even
A business is said to "break-even" when it is earning enough sales to cover all its

The break-even point happens when total sales = total costs.

In other words, at the break-even point, the business isn't making a profit, but it
isn't making a loss either!


Page 5

Preview of page 5
Calculating Break Even
Three methods of calculating break-even level of output
­ A table (or spreadsheet) showing sales and costs over different levels of
­ 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,…

Page 6

Preview of page 6
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…

Page 7

Preview of page 7
Method 2 ­ Using a
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…

Page 8

Preview of page 8
Method 3 ­ Break Even
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

90 Profit
Sales and costs (£'000)

50 Fixed costs…

Page 9

Preview of page 9
Margin of Safety
Margin of safety/safety margin = the amount by which demand can fall before a
firm incurs losses i.e. how close the firm is to the break-even point level of output

The difference between the actual output and the break-even
output is known as the margin of safety…

Page 10

Preview of page 10
Changes to Break
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…


No comments have yet been made

Similar Business Studies resources:

See all Business Studies resources »