Break-Even Analysis Video and Activity

Watch the video named ‘Break-Even Analysis | How to Calculate the Break-Even Point Explained’ in the Two
Teachers YouTube Channel ‘Business Studies Videos’ Playlist and answer the following questions.
http://www.youtube.com/c/TwoTeachers

1. Explain what the break-even point is and why a business would use break-even analysis.

A break-even analysis is a financial calculation that weighs the costs of a new business, service or
product against the unit sell price to determine the point at which you will break even.

2. If costs are higher than the revenue, is the business making a profit or a loss?

the profit is a negative number, which is classed as a loss

3. What is contribution and how is it calculated?

Contribution is the difference between sales and variable costs of production.

Formulae: Contribution = total sales less total variable costs.

Contribution per unit = selling price per unit less variable costs per unit

4. If the average variable cost per unit is £7, and the average selling price per unit is £19, what is the contribution
per unit?

12 pounds

5. What is the break-even formula?

Break-Even point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit)
6. If the average variable cost per unit is £3, the average selling price is £15 and fixed costs are £25,000, what is
the break-even output in units and the break-even sales revenue?

2083.33

7. Explain the margin of safety, how it is calculated and what it means to a business

The margin of safety is the amount sales can fall before the break-even point (BEP) is reached and the business
makes no profit. This calculation also tells a business how many sales it has made over its BEP. The margin of
safety is calculated as follows:

Margin of safety = actual sales − break-even sales.

8. Compare at least one strength and one limitation of using break-even analysis

strength-Helps entrepreneur understand the viability of a business proposition, and also those who
will lend money to, or invest in the business
weakness-Unrealistic assumptions – products are not sold at the same price at different levels of
output; fixed costs do vary when output changes

9. Identify all of the points on the break-even chart below:

loss