Learning
Outcome:
Do Now:
To Understand
what makes a
product or service
financially viable
Recap these terms:
• Fixed costs
• Variable costs
• Total costs • Working
Individually
• Revenue • Noise level: 0
• Seated in the
Stretch – What is Total Contribution? middle
• No logging onto
computers yet
2.3 Use of break-even as an aid to • Writing answers
decision making on paper
2.3 Use of break-even as an aid to
decision making
Do Now: Answers
• Fixed costs – Costs that don’t change with output
changes
• Variable costs- Costs that change/vary with output
changes
• Total costs = TC + VC
• Working
Individually
• Revenue – Money earned from selling output • Noise level: 0
TR = Selling price – output level • Seated in the
middle
• Total Contribution = Total Sales Revenue – Total • No logging onto
variable costs computers yet
• Writing answers
on paper
2.5 Where does this lesson fit?
Previous learning:
2.4 How businesses use:
LO1: Use BEA to make business
• break-even data decision
• contribution to sales graphs
LO2: Explain at least 3 types of
business decisions
Todays Learning
2.5 How to use Break-even analysis to make business
decisions
• Make or Buy
• Acceptance of special orders
• Discontinuing a product or service based on contribution
• Price setting
Break-even graph
LOSS Break Even Chart for T-shirts
1. At 1500 units
will the 40000
business make
a profit or a 35000
loss?
PROFIT 30000
2. At 2500 units
will the 25000 Fixed Costs
business make Variable Costs
a profit or a 20000
£
loss? Total Costs
15000 Revenue
3. What is the BEP =2000
BEP? units 10000
4. If they sell 5000
2700 units how
much profit or 0
loss is made? 0 1000 2000 3000
No of units
Total Revenue(30k) – Total
Cost(25k) = £5000 Profit
2.5 How to use Break-even analysis to
make business decisions
How to use
Make
break-even
or Buy
analysis for
decision
making?
Acceptance of
special orders
Others
Additional work
Price Discontinuing a
setting product/servic Scarce
e based on resources
contribution
“What if”
scenarios
Make or Buy
Businesses may choose to If a business has “spare
manufacture their own products production capacity”
for a number of reasons
A unique idea Production resources remain idle
Wants to supply its own brand Fixed cost will still need to be
Not be dependent on external paid but also wont increase with
suppliers output
May be cheaper to manufacture Variable costs need to be
own products considered
Decision
If buying price is less than variable costs of making – BUY
If the buying price is greater than the variable costs of making - MAKE
Acceptance of special orders
Should a business sell goods below the usual price?
Combating competitors selling similar products
Accepting an order to produce and sell at a lower
price
Maintaining production in tough times! To keep people
employed
Assisting in the disposal/sale of obsolescent (out of
date) products or perishable goods
Promoting a new product
Discontinuing a product/service
based on contribution
Contribution =
Selling price per unit – VC
per unit
Decisions – May decide to discontinue if
contribution is less than other products to costs
Example: If VC increases or selling price
reduces (VC has risen for many businesses since
the cost of living crisis)
Decision – Could put selling price up but this
would depend on the principals of Supply and
demand!
Price setting
Businesses will use Break-even analysis to
work out the best selling price for their
products. Contribution and profit calculations
are essential to analyse when making price
decisions
Decisions: Increase profit by reducing product
price but increase number of sales
Test your understanding
Statement True or Explain your How would you change this
false answer to benefit your business &
why?
A business may produce a TRUE
product which is unique
If the buying price is less
than the variable costs of FALSE
making – you should MAKE?
If production capacity is low
a business should either TRUE
cease making a product or
create extra capacity
If TC is higher than TR a
business has passed break FALSE
even point
If contribution is low for a
product it could be TRUE
discontinued
You can increase profit by
decreasing prices and TRUE
Activity Time: 10
minutes
4 Groups of 3
Each group will be given a fact sheet about 1 factor affecting decision
making for break even analysis
In groups you are to use the fact sheet and any additional research using
your textbook or computer to produce a 3 minute presentation explaining
the given factor. You must use examples and research.
You will then be asked to either present your findings to the rest of the
class
Once all presentations are delivered, you will do a quiz on ALL factors – so
make sure you listen to the other presentations!
Stretch – You can go into further detail and find a real life business
example as supporting evidence or maybe use Mugs R Us to
illustrate your points.
To support – structure your work using a power point presentation with
a minimum of 3 slides and a maximum of 6 slides.
Question time
Kristen runs a small business making balloon decorations for
weddings, birthday and corporate events. She sells an average of
100 displays per month at a price of £90. Each balloon display
costs £20 to make. She delivers them to venues costing her
£1000 per month, pays an assistant a wage of £900 per month
and advertises in a local paper for £150 per month. As a sole
trader Kristen does not pay herself any money but is hoping to
be able to take money out of the business if it makes a profit.
1. What is meant by the term break-even?
2. Calculate Kristen’s break even point.
3. Will Kristen be able to take some money out of the
business? Justify your answer.
LO1: Use BEA to make business
Break-even – Exit Ticket decision
LO2: Explain at least 3 types of
business decisions
If the buying price is less than VC then you
should MAKE your own product
Can you
You can increase profit by reducing prices
explain these
emotions?
You should maintain production of a
particular product during tough times?
Write your answers on a post-it note
and hand in.
