UNIT 2

GCSE BUSINESS –
5.4 – Break Even
Aims and Objectives
Specification Points
• One

Three
• Two
•

Key Words and Terms

1.
2. T o tal co sts
Fixed costs

3. Revenue
Specification
Forecasting
• you sh o u ld start to n o tice th at a lo t o f p rev io u s co n ten t is co m in g b ack to
us/being revisited this unit

•T h is is b ecau se fin an ce an d fin an cial d ata u n d erp in s everything w e d o :

• Planning
• Aims / Objectives
• Marketing
• Pricing Strategy
• Business location
Forecasting
• You may have asked last lesson:
• “How do we know what our costs are going to be?”

• This is an especially sensible question when it comes to variable costs

•T h e an sw er is we don’t actually know! So we make a “best guess with the data

w e h av e.”

• This is called Forecasting

Forecasting
• Forecasting allows us to model different likely scenarios in a business

• The beauty of modelling is we can experiment with the inputs and observe the effect on outputs

• This is especially useful when setting goals o r w o rk in g o u t h o w w e can ach iev e th em .

• There is a quite obvious disadvantage to this:

• All this relies on the quality of our data / predictions
• If we make inaccurate assumptions, then all our conclusions are also wrong

We have an important equation for

you to learn: Rubbish in = rubbish out
Modelling
•W e are all v ery, v ery fam iliar w ith th e co n cep t o f m o d ellin g at th e m o m en t

•T h e n ew s h as b een
Notice the vastly different
filled with graphs
an d m o st o f th e
outcomes in this model
depending on the changes

tim e, th ese are

in the inputs/variables

forecasts

• I’m sure it hasn’t escaped your attention that what has been forecasted, doesn’t often happen in reality .
Break Even
• Break even means:
• “The point at which a business will begin to make a profit from sales as all costs have
been covered.”

• In other words it tells us:

• How many items/units we need to sell…
• … in order to cover our costs and make a clear profit.
Break Even
• Break even is usually shown as a graph and will show:
• Fixed costs
• Total costs
• Revenue
• And sometimes variable costs as a separate line

• You can see from the examples below, it’s easy to see the “break even point” as the point where
revenue crosses over the total costs line
Quick break even task
• How many units do each of the following need to sell in order to break even?
How many units?
How many units?
Break even modelling task
•O p en “5.4 – B reak E v en A n aly sis” fro m th e sh ared area

• Enter the unit price, fixed costs, variable costs into the spreadsheet

•W o rk o u t h o w m an y u n its are n eed ed to b reak ev en in each scen ario

•Y o u w ill n eed to ad ju st th e “m ax im u m u n its so ld ” to m ak e th e g rap h scale

correctly
Break even task

1. A business sells burgers from a mobile catering van outside of football

games. They charge £2.50 for a burger, fixed costs are £300 for the rent of
Break even : 200 units.

the mobile van, and variable costs work out at £1 per burger sold.

2. Dacia sell their cheapest car £6999

for even cost them £2,500,000 to design
, itunits.
and set up manufacturing. Variable costs are £900 per vehicle sold .
Break : 410

3. A teach er h as b een co m m issio n ed to w rite an ex citin g , in fo rm ativ e tex tb o o k

for their GCSE Business studies course. The publisher plans to sell each
book for £25, The author was given £25,000 up front for the book and this
Break even : 2500 units.

covers all fixed costs. It costs £15 to print and distribute each book.
Problem
• Looking at this example, what is the problem with the graph?

Exactly what
number is this?
910, 920? 917??
Graphs
•D raw in g a g rap h is d efin itely a g o o d id ea. It h elp s u s to :
• Visualise the situation
• Quickly interpret the data
• Come to conclusions quickly

•H o w ev er it:
• Requires us to produce a table of data
• Can be difficult to accurately and exactly read data frompoints on a line
Break Even Formula
• Luckily, we can quickly work out break even using a formula:

𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
𝐵𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛=
𝑆𝑎𝑙𝑒 𝑝𝑟𝑖𝑐𝑒𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 − 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

• For the examyou will be expected to:

• Interpret but not drawa break even graph
• Use the formula to calculate break even
• Interpret the data to make sensible business decisions:

“The number of units needed to break even is extremely high. They will need to raise
the sale price to break even sooner, because…”
Formula task
• Using the formula, work out the break even point for the following businesses . Always round
UP to the nearest unit.

𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
𝐵𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛=
𝑆𝑎𝑙𝑒 𝑝𝑟𝑖𝑐𝑒𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 − 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
1. A florist buys flowers in bulk at a cost of £7000. They make a range of bouquets that
sell for £25 and it costs £2.50 per bouquet in variable costs to make .
Break even : 312 units.

2. Asmartphone costs £999. The components, construction, packaging and shipping to retailers costs
£400 per phone. £1, 500, 000 was spend on designing the phone.
Break even : 2,505 units.

3. Rumour has it, it cost Bugatti $1.6bn to produce 450 Veyron cars . They each sold for
approximately $2.5 million. Assuming fixed costs were approximately $ 1.25bn and
Break even : 726 units.

variable costs per unit were approximately $777,778 per car, how many would they
have needed to make to break even?
Formula task
• Using the formula, work out the break even point for the following businesses . Always round
UP to the nearest unit.

𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
𝐵𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛=
𝑆𝑎𝑙𝑒 𝑝𝑟𝑖𝑐𝑒𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 − 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
1. A florist buys flowers in bulk at a cost of £7000. They make a range of bouquets that
sell for £25 and it costs £2.50 per bouquet in variable costs to make .

2. Asmartphone costs £999. The components, construction, packaging and shipping to retailers costs
£400 per phone. £1, 500, 000 was spend on designing the phone.

3. Rumour has it, it cost Bugatti $1.6bn to produce 450 Veyron cars . They each sold for
approximately $2.5 million. Assuming fixed costs were approximately $ 1.25bn and
variable costs per unit were approximately $777,778 per car, how many would they
have needed to make to break even?
Exam Question
Exam Question

𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
𝐵𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛=
𝑆𝑎𝑙𝑒 𝑝𝑟𝑖𝑐𝑒𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 − 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Homework
•H av e a read o f th e fo llo w in g fo r n ex t lesso n :

•
https://www.bbc.co.uk/bitesize/guides/z67mpv4/revision/1

• There’s a lovely diagram…

Review
• You should now know:
• T h e d efin itio n o f b reak ev en
• How break even is used to model and make decisions in a business
• How to interpret a break even graph
• How to calculate break even using a formula