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!

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

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Page 1

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Break Even Analysis

Page 2

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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…

Page 3

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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…

Page 4

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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.

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

When…

Page 5

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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,…

Page 6

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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…

Page 7

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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…

Page 8

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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…

Page 9

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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. 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

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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…

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