Break Even AnalysisAS Business Studies

Aims and Objectives

Aim: •Understand contribution

Objectives:Define contribution and break evenExplain the importance of break evenAnalyse contribution and break even

figures

Starter• If a business is breaking even, what does this mean?

?

Break Even Definition

•When a business is just earning enough sales revenue to pay its total costs.

•It is not making a profit, nor is it making a loss.

Why is Break Even Important?

•Discuss in your group why knowing the break even point may be important for businesses and entrepreneurs.

Why is break even important?

1• Important for entrepreneur to aim for.

2• If business can break even early, there is

potential to make early profits.

3

• Banks and lenders will want to know, as the longer it takes to break even, the greater the risk

4• Important decision making tool which can

be used by managers to develop strategies

Contribution

•Difference between sales revenue and variable costs of production.

•It is the surplus made after all variable costs have been paid for from sales revenue. This surplus goes towards paying fixed costs.

Contribution Per Unit

•Difference between the selling price of one unit and the variable cost of producing one unit.

•Selling Price Per Unit £8.99•Variable Cost Per Unit £4.00

•Contribution Per Unit = £4.99

•Calculate for the five businesses.

Total Contribution

•Contribution Per Unit xNumber of Units Sold or Number of Customers

•Can be used to calculate profit:

•Total Contribution – Fixed Costs

•Calculate Total Contribution and Profit for the five businesses.

Methods of Increasing Contribution•How could a business increase its

contribution figures to make a higher potential profit? Discuss

1) Increase the selling price per unit

2) Reduce variable costs per unit.

Break Even

•Break Even Level of Output: this is the level of output or the amount of customers that earns enough revenue to cover total costs.

•No profit and no loss is made.

•Break Even = Fixed Costs of Business Contribution Per Unit

Break Even

•Calculate for the five businesses.

Finance Questions

•Speed Revise

•Questions 13 minutes

•Peer Assess

•Cash Flow •Contribution Calculating•Calculating Profit

What is meant by the term cash flow? (2 marks)