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Unit 3.3 Effective financial management > Chapter 14 Break-even charts and break-even analysis > Flashcards

Chapter 14 Break-even charts and break-even analysis Flashcards

1
Q

Chapter 14

How are break-even charts drawn?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

To draw a chart the following steps need to be followed:

  1. Label the vertical axis “sales and costs in pounds”.
  2. Label the horizontal axis “sales/production (units)”.
  3. On another piece of paper sketch the scales that you want to use given the data, then use this plan on the chart.
  4. Plot any two points from the sales revenue data for the sales revenue line and then draw a straight line for sales revenue (assumes that the price per unit does not change) – if the information is not given for sales revenue, then work out two points, e.g. for 1000 units sold and 1500 units sold. The start of the line should be through the origin (where the axes meet).
  5. Draw a horizontal line for total fixed costs starting at the point on the vertical axis at the level of costs.
  6. At the same starting point it is possible to draw the total costs line. Total costs are fixed costs plus variable costs. Work out what the total costs are for say 1000 units and 1500 units. Then draw the straight line starting at the same point as the fixed costs started and then through the two plotted points.
  7. Where the sales revenue crosses the total costs line is the break-even point. Read off the units of sales to give the break-even level of sales.
  8. The gap between the total costs line and sales revenue line after the break-even point represents the level of profit.
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2
Q

Chapter 14

How can break-even charts be analysed?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

It is important for a business to understand its break-even point because the contribution from every unit sold above the break-even point adds to profit.
The break-even point provides a focus for the business, but also helps it work out whether the forecast sales will be enough to produce a profit and whether further investment in the product is worthwhile.

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3
Q

Chapter 14

How can the margin of safety be calculated?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

The number of sales above the break-even point is called the margin of safety.
To calculate it:
Number of products actually or predicted to be sold – break-even point

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4
Q

Chapter 14

How do changes in costs affect the break-even point?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

If costs go up, then the break-even point will also go up. This is because you will have to sell more products as the profit made per item will go down.
If costs go down, then the break-even point will also go down. This is because you will have to sell fewer products as the profit made per item will go up.

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5
Q

Chapter 14

How do changes in price affect the break-even point?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

If prices go up (selling prices), then the break-even point will come down. This is because you will have to sell fewer products to generate the same amount of revenue.
If prices go down, then the break-even point will go up. This is because you will have to sell more products in order to generate the same revenue.

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6
Q

Chapter 14

What is the value to a business of using break-even analysis?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

Break-even analysis helps a firm: understand the past; achieve future targets; launch a new product; start a new business; and write an effective business plan.
Break-even does not tell a firm how many products they will sell only how many they need to sell to cover the costs.

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7
Q

Chapter 14

How can the break-even point be calculated?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

Break-even is where revenues just equal costs.
It allows firms to understand how many products it needs to sell to cover the costs before it moves into profit.
If a firm sells less than the break-even it will make a loss.
The formula for calculating break-even is:
Fixed costs / selling price – variable cost per unit.
The selling price – variable cost per unit is also called ‘Contribution’.

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8
Q

Chapter 14

What is meant by Break-even chart?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

A graph which shows total revenue and total cost, allowing the break-even point to be drawn

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9
Q

Chapter 14

What is meant by Break-even point?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

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The level of output where total revenues are equal to total costs; this is where neither a profit or a loss is being made

Break-even point is where total revenue = total costs (where total costs are variable costs plus fixed costs) (see contribution for more information)

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10
Q

Chapter 14

What is meant by Contribution analysis?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

Another way of finding the break-even point.
Contribution = sales revenue per item – cost per item*

Then to calculate break-even:

Break-even = fixed costs / contribution

or

Break-even = fixed costs / (sales revenue per item -

                                            variable cost per item)
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11
Q

Chapter 14

What is meant by Fixed costs?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

Costs which do not vary with the amount produced, such as rent, business rates, advertising costs, administration costs and salaries

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12
Q

Chapter 14

What is meant by Margin of safety?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

The amount of output between the actual level of output where profit is being made and the break-even level of output; if the margin of safety is zero, then production is at or below the break-even level
Margin Of Safety = level of output – break-even point

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13
Q

Chapter 14

What is meant by Total costs?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

All of the costs of a business: Equal to fixed costs plus variable costs
Total costs = fixed costs + variable costs
Or the formula: TC = FC + VC

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14
Q

Chapter 14

What is meant by Total revenue?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

The revenue earned by a business from the sale of a given quantity of products.
Total Revenue = Average price x Number of products sold
Or the formula: TR = P x Q

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15
Q

Chapter 14

What is meant by Variable costs?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

Costs which change directly with the number of products made by a business, such as the cost of buying raw materials, piece rate wages and electricity to run the machines
Total variable costs = average cost x quantity produced

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16
Q

Chapter 14

What is the relevance of margin of safety to a business?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A
  • it shows them how many products they need to sell in order to make a profit
  • it will show them how far demand can fall before they will make a loss
  • It will allow them to decide if they will make enough profit to support the development of new products.
17
Q

Chapter 14

• Selling price £30

What would be the monthly revenue earned if the business sold 1000 products?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

Selling price x Quantity
£30 x 1000 = 30,000

18
Q

Chapter 14

  • Fixed costs = £8000
  • Variable costs are £14 per set menu
  • Selling price £30

What would be the profit or loss in pounds (£) if 650 products were sold?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

Profit / (Loss) = Revenue – Costs

Revenue – (Fixed Costs + Variable Costs)

(£30 x 650) – £8000 + (£14 x 650)

£19,500 – £8000 + (£9,100)

£19,500 - £17,100 = £2,400 profit

19
Q

Chapter 14

What are the benefits of charging a higher price to your customers?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A
  • the profit margin of the business will be higher than with a lower price
  • it may be seen as being a product of higher quality
  • they will have to sell less products in order to break-even
20
Q

Chapter 14

What are the disadvantages of charging a higher price to your customers?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

• Customers may buy elsewhere as they may no longer be able (or willing) to pay the higher price

21
Q

Chapter 14

What are the benefits of charging a lower price to your customers?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A
  • the business it will usually attract more sales due to a lower selling price
  • people may believe they are getting good value for money and are more likely to buy that product from the business
  • It increases its reputation as they will have more customers.
22
Q

Chapter 14

What are the disadvantages of charging a lower price to your customers?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A
  • Profits might fall
  • Rivals may match their price reductions
  • They will have to sell more products to break-even
23
Q

Chapter 14

  • Fixed costs £2 400 000
  • Variable costs are £140 per product
  • Selling price £300 per product

Calculate the break-even point. Show your workings and the formula used.

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

Break-even is where total revenue = total costs.
In this instance it is calculated by:
fixed costs /( sales revenue per item - variable cost per item)
2,400,000 / (£300 - £140)
2,400,000 / £160 = 15,000 products

24
Q

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Chapter 14

· Fixed costs £2 400 000

· Variable costs are £140 per product

· Selling price £300 per product

Calculate the level of profit or loss with sales of 20,000 products. Show your workings and the formula used.

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

Profit / (Loss) = Revenue – Costs
Revenue – Fixed Costs + Variable Costs
(£300 x 20,000) – £2,400,000 + (£140 x 20,000)
£,6,000,000 – (£2,400,000 + £2,800,000)
£6,000,000 - £5,200,000 = £800,000 profit

25
Q

Chapter 14

Using the break-even chart, state the number of apps Shiftjelly must sell in order to break-even.

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

1250

26
Q

Chapter 14

Using the break-even chart, state the revenue at the break-even point.

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

£2,500

27
Q

Chapter 14

If 3,000 apps are sold, what is the margin of safety?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A

Margin of safety = quantity sold – break-even point
3000 – 1250 = 1750

28
Q

Chapter 14

In what ways is break-even analysis a valuable tool in allowing a business to plan?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A
  • Can see how many products need to be sold to break-even
  • Can ask ‘What if’ questions
  • Can help set sales targets
29
Q

Chapter 14

In what ways is break-even analysis NOT a valuable tool in allowing a business to plan?

Edexcel 2BS01 Business Studies GCSE Unit 3.3

A
  • Figures may not be accurate
  • Only useful if used alongside other tools such as market research
  • Simplistic

Unit 3.3 Effective financial management (4 decks)

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