GCSEBusinessEdexcelRevision Notes1. Investigating Small Business1.3 Putting a Business Idea into Practice1.3.4 Breakeven Point

Breakeven Point (Edexcel GCSE Business)

Revision Note

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Lisa Eades

The Breakeven Point

  • The breakeven point is a useful metric to help a business understand how many units it needs to sell before it starts making a profit
    • The breakeven point is the number of units that need to be sold for total costs to equal the sales revenue
       
  • The breakeven point can be calculated using one of two formulas
  1. Break space even space point space in space units space equals space fraction numerator Fixed space Cost over denominator open parentheses Selling space price space minus space variable space cost close parentheses end fraction

  2. Break space even space point space in space costs divided by revenue space equals space break space even space point space in space units space cross times space sales space price
     

Worked example

Bravo Burgers has the following financial information for the month of May.

  £ May
Raw materials for each burger £2.10
Packaging for each burger £0.20
Fixed costs  £1 730
Selling price for each burger £4.95

(a) Using the information in the table, calculate the level of output required to break even in May. You are advised to show your workings. (2)

 

Step 1 - Calculate the variable costs per burger

      Variable cost per burger = raw materials + the packaging

       Variable cost per burger =  £2.10 + £0.20 = £2.30.  (1 mark)

 

Step 2 - Substitute the values into the breakeven formula

  Break space even space point space in space units space equals space fraction numerator Fixed space Cost over denominator stretchy left parenthesis Selling space price space minus space variable space cost stretchy right parenthesis end fraction Break space even space point space in space units space equals space fraction numerator 1 comma 730 over denominator stretchy left parenthesis 4.95 space minus space 2.30 stretchy right parenthesis end fraction Break space even space point space in space units space equals space fraction numerator 1 comma 730 over denominator stretchy left parenthesis 2.65 stretchy right parenthesis end fraction Break space even space point space in space units space equals space fraction numerator 1 comma 730 over denominator stretchy left parenthesis 2.65 stretchy right parenthesis end fraction Break space even space point space in space units space equals space 652.83      (1 mark)

 

Step 3 - Round to the nearest unit

     653 burgers need to be sold to break even in May (2 marks for a correct answer)

Exam Tip

Always round up the break even point to the nearest whole unit.

Interpreting Break Even Diagrams

  • A break even chart is a visual representation of the break even point and is used to identify the following 
      

2-2-3-interpretation-of-break-even-charts

The break even chart for A2B Limited shows that at 324 units the total revenue = the total costs
  

Diagram analysis 

  • Fixed costs do not change as output increases
    • A2B's fixed costs are £8,000 and these do not change whether the business produces 0 units or 500 units
       
  • Total costs are made up of fixed and variable costs
    • At 0 units of output, they are made up exclusively of fixed costs
    • At 500 units the total variable costs equate to £11,800
    • This line slopes upwards because total variable costs increase as output increases
       
  • The revenue line also slopes upwards
    • At 0 units of output, the revenue is £0
    • At 500 units the total revenue equates to £11,800
    • Revenue will increase with the output
    • The line will slope more steeply than the total costs and will cross the total costs line at some point
       
  • The point at which the total costs and the revenue lines cross is the break even point
    • The break even level of output for A2B is 324 units

  • The margin of safety can be identified as the difference on the x-axis between the actual level of output (in this case 450 units) and the break even point

  • The profit made at a specific level of output can be identified as the space between the revenue and total costs lines
    • In this instance, the profit made at 450 units of output is £14,400 - £11,250 = £3,150

Exam Tip

When calculating the break even point write down the break even formula first and then find the figures you need to fill in the data required.

This allows you to check that you have everything you need for the calculation - and you will be able to identify very quickly whether you need to carry out further calculations such as total fixed costs.

The Margin of Safety

  • The margin of safety provides useful information to a firm on how many sales they could lose before they start making a loss
    • The margin of safety is the amount by which the number of units sold is greater than the break even point
    • The margin of safety can be calculated using the following formula

Margin space of space safety space equals space actual space or space budgeted space sales space minus space break space even space sales

 

  • Businesses prefer their margin of safety to be as large as possible
    • This means that if demand for their products drops unexpectedly, the business will continue to make a profit

Worked example

Figure 1 shows the weekly break-even diagram for the Yorkshire Rare Breed Sausage Company. 

1-3-4---the-margin-of-safety

Figure 1: Output, Costs & Revenues of the Yorkshire Rare Breed Sausage Company

Using Figure 1 above, calculate the weekly margin of safety. Show your workings and the formula used. (3)

 

Step 1 - Write the formula down

   Margin space of space safety space equals space actual space or space budgeted space sales space minus space break space even space sales (1 mark)

 

Step 2 - Read from the chart and substitute values into the formula

   Margin space of space safety space equals space actual space or space budgeted space sales space minus space break space even space sales Margin space of space safety space equals space 4 comma 000 space minus space 2 comma 500 Margin space of space safety space equals 1 comma 500 space sausages

(1 mark for any correct working; 3 marks for the correct answer)

Exam Tip

Use a ruler to help you to read break even charts accurately.

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    Lisa Eades

    Author: Lisa Eades

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.