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Edexcel GCSE Business
Break Even
Today’s Learning Objectives
• Understand the principal of break-even.• Appreciate how to draw and interpret break-
even charts.• Understand how to calculate the break-even
point and the margin of safety.
Which businesses use break-even?
• Chelsea F.C. will use break-even analysis using:
• Total Revenue such as shirt sales, ticket sales & sponsorship.
• Total Costs such as player wages, transfers, stadium maintenance.
• Topshop will use break-even analysis using:
• Total Revenue such as dress, bag and shoe sales.
• Total Costs such as staff wages and rent!
Definition Alert!!Break EvenWhat is it?
Which formulae do we need?
‘It is the level of output where revenues just equal costs’
Total Revenue = Quantity Sold x Average Price
Total Costs = Fixed Costs + Variable Costs
Total Variable Costs = Quantity Sold x Variable Cost
Return to questions!
Create your BE table...How many have you sold?
How much revenue do you make based on this many sales?
Total Fixed Costs(This stays the same throughout!)
What are the Total Variable Costs?
What are your Total Costs?
How much profit/loss have you made?
The 5 point process to building a break even chart!
Stage 1 – Create your graph!• Create two axis on a graph
and label them with sales and revenue (use relevant figures!)
For example....
Label Revenue on the y-axis
Label Sales on the x-axis
The 5 point process to building a break even chart!
Stage 2 – Insert your revenue line!
• Can you remember the equation we need for REVENUE?
Find equations!
For example....
Insert your revenue line
REMEMBER:THE REVENUE LINE STARTS FROM 0!
The 5 point process to building a break even chart!
Stage 3 – your Fixed Costs!• At this point you should have
created you total costs table! • What were the two equations
we needed for costs?Find equations!
Now draw on your fixed costs – this line is always flat!
REMEMBER F for FLAT!
For example....
Fixed costs of £120,000
The 5 point process to building a break even chart!
Stage 4 – Your Variable Costs!
Now draw on your variable costs!
For example....Variable cost line – also called total costs!
The 5 point process to building a break even chart!
Stage 5 – Find Your Break Even Point!
• Where the Total Revenue line crosses the Total Costs line is the Break Even Point!
• You can calculate the amount of sales you need to make by drawing a line
down to the x axis!
For example....
Break-Even Point! Hurrah!
Now it’s your turn...
• You work for Chelsea Football Club, and they have asked you to carry out a break even analysis based on shirt sales!
• You will need to calculate how many shirts the club needs to sell to reach their break-even point this season!
• Once you have completed the figures in the table, create your BE chart on graph paper!
Did you know? When David Beckham signed for LA Galaxy, he had sold over 250,000 shirts before he had even arrived at the club!
Forget to buy your own shirt David?
Shirt Sales
Total Revenue (£ millions)
Total Fixed Costs (£ millions)
Total Variable Costs (£ millions)
Total Costs (£ millions)
Profit & Loss (£ millions)
100,000
200,000
300,000
400,000
500,000
Need the equations again?Click here!
Table Answers
Chelsea Predicted Financial Information for 2011-2012:
Fixed Costs £5 millionVariable Cost per shirt £5
Shirt Price £40
Finished the table? Start drawing your BE graph!!
Chelsea Predicted Financial Information for 2011-2012:
Fixed Costs £5 millionVariable Cost per shirt £5
Shirt Price £40
Shirt Sales
Total Revenue (£ millions)
Total Fixed Costs (£ millions)
Total Variable Costs (£ millions)
Total Costs (£ millions)
Profit & Loss (£ millions)
100,000 4 10 0.5 10.5 (6.5)
200,000 8 10 1 11 (3)
300,000 12 10 1.5 11.5 0.5
400,000 16 10 2.0 12.0 4
500,000 20 10 2.5 12.5 7.5
Feeling confident?
• I will choose five people to contribute to the break-even graph on the board.
• There are roles for the following aspects:1.Drawing the axis
2.Drawing the Revenue3.Drawing the Fixed Costs
4.Drawing the Variable Costs5.Finding the Break-Even Point
How did you get on with the graph? Remember to show your working when doing your calculations!
What is the Margin of Safety?Definition Alert!!
MARGIN OF SAFETY = ACTUAL PRODUCTION LEVEL – BREAK-EVEN PRODUCTION LEVELMARGIN OF SAFETY = ACTUAL PRODUCTION LEVEL – BREAK-EVEN PRODUCTION LEVEL
If the level of shirt sales was actually 350,000 shirts, what is the Margin of Safety for Chelsea?
