Business Mathematics

Break-Even Point (BEP)

Analysis
 Revenue and Costs
“Revenue” is income earned by a firm when
they sell either the goods it makes or the
services it offers. Money received from
customers is called sales, sales revenue or
turnover.

“Costs” are all the types of expenditure that

a firm has when it first starts up and when
it is operating on a day-to-day basis.
 Revision …
Costs that do not vary with output are called:
FIXED COSTS
Costs that do vary with output are called:
VARIABLE COSTS
The money a business receives from its customers
is called:
REVENUE (OR SALES REVENUE)
To calculate profit, you do the sum: Total revenue
minus ?
TOTAL COSTS
The point at which total revenue equals total costs
is called:
THE BREAK-EVEN POINT
 Fixed and Variable Costs
Fixed Costs
Costs that DO NOT change when the level of output
changes.
Fixed costs stay the same whether a firm is producing 100
units or 1,000 units. Fixed costs still have to be paid
even if nothing is produced. eg: rent, rates, insurance,
wages, leasing equipment, electricity bill

Variable Costs
Costs that DO change when the level of output changes.
The more that is produced, the more of these items have
to be purchased. eg stock and raw materials

Would the item be paid for if nothing was produced?

If yes, it is a FIXED COST
 Fixed or Variable Cost?
Loan repayment to a bank
Fixed Cost
Purchase of CDs and USB sticks
Variable Cost
Insurance for the web design premises
Fixed Cost
Wages
Fixed Cost
Purchase of paper to print invoices to customers
Variable Cost
Constructing a Break-Even Chart
Sales
revenue
£
Profit if we hit
our sales target Total
Costs
Break-even
Point

Fixed
Costs

Margin of Safety

Output
 Break-even Table: based on a
price of £200
Number of
Units 0 4 8 12 16
Fixed Costs
800 800 800 800 800

Variable Costs 0 400 800 1200 1600

Total Costs
800 1200 1600 2000 2400

Sales Revenue
0 800 1600 2400 3200

Fixed costs are £800, the variable cost per unit is £100
 Break-Even Chart: Price £200
£
Revenue
Sales
3200 revenue

2800
Total
2400 Costs
2000 Break-even
Break even
Point Profit if we sell
Point =
1600 12 units = £400
8 units
1200 Loss if we only
sell 4 units = £400
800 Fixed
Costs
400

4 8 12 16 Number of units
 Break-even Table: based on a
price of £100
Number of
Units 0 2 4 6 8
Fixed Costs
200 200 200 200 200

Variable Costs 0 100 200 300 400

Total Costs
200 300 400 500 600

Sales Revenue
0 200 400 600 800

Fixed costs are £200, the variable cost per unit is £50
 Break-Even Chart: Price £50
£
Revenue
Sales
800 revenue

700
Total
600 Costs
500 Break-even
Point Profit if we sell
400 6 units = £100

300 Loss if we only

sell 2 units = £100
200 Fixed
Costs
100

2 4 6 8 Number of units
 Calculating the break-even
point without a graph
To calculate how many products we
need to sell in order to break even
and cover our costs.
Formula:

Fixed Costs
Contribution (Price – Variable cost)
 Use the break-even formula to work out the
break-even point for questions 1-5 below
Fixed Costs
Contribution (Price – Variable cost)
1. Fixed cost = £20,000, price = £4,000, variable cost =
£2,000 20,000 / 2,000 = 10

2. Fixed cost = £10,000, price = £4,000, variable cost =

£2,000
10,000 / 2,000 = 5

3. Fixed cost = £26,000, price = £5,000, variable cost =

£3,000
26,000 / 2,000 = 13

4. Fixed cost = £50,000, price = £20,000, variable cost =

£10,000
1,000 / 500 = 2

5. Fixed cost = £1,000, price = £800, variable cost = £300

50,000 / 10,000 = 5
 Using the Break Even Formula
Fixed Costs
Price – Variable Cost
1. Fixed cost = £600, price = £400, variable cost = £100
600 / 300 = 2
2. Fixed cost = £10, price = £3, variable cost = £1
10 / 2 = 5
3. Fixed cost = £260, price = £50, variable cost = £30
260 / 20 = 13
4. Fixed cost = £50,000, price = £4,000, variable cost =
£2,000
50,000 / 2,000 = 25
5. Fixed cost = £1,000, price = £400, variable cost = £200

1,000 / 200 = 5
 Finance Terms
Variable Cost
Fixed Cost
Total Costs
Sales Revenue

Break Even Point

 Break-even Table: based on a
price of £100
Number of
Units 0 5 10 15 20
Fixed Costs
500 500 500 500 500

Variable Costs 0 250 500 750 1000

Total Costs
500 750 1000 1250 1500

Total Revenue
0 500 1000 1500 2000

Fixed costs are £500, the variable cost per unit is £50
 Break-Even Chart: Price £50
£
Revenue
Sales
2000 revenue

Total
1500 Costs
Break-even
Point Profit if we sell
1000 15 units = £250

Loss if we only
sell 5 units = £250
500 Fixed
Costs

5 10 15 20 Number of units
 Effect on the BEP if costs or
revenue change
If fixed costs or variable costs increase,
the BEP will increase – the firm will have
to sell more products to cover their
costs.

If the selling price is increased, the BEP

will decrease – the total revenue will
increase so the firm can sell less
products to cover their costs.
How a firm can improve the BEP
1. Increase the price of the product.
The firm will receive more revenue
and will have to sell less products in
order to break even.

2. Decrease the fixed or variable

costs. The total costs will then be
lower so the firm will have to sell
less products in order to break
even.
 Break Even: Exam Example
A café has fixed costs of £5,000 per month. The variable costs are £5
per item and the selling price is £10.

1. What is the BEP?

• £5,000 / £5 = 1,000
2. If the fixed costs rose to £6,000, what would be the effect on the
break even point for the firm?
• BEP would be higher – have to sell more products in order to break
even
• BEP would be 1,200 (£6,000 / £5 = 1,200)
3. If the fixed costs stayed at £5,000 but the variable cost rose to £6
per item, what would be the effect for the firm?
• BEP would be higher – have to sell more products in order to break
even
• BEP would be 1,250 (£5,000 / £4 = 1250)
4. If the fixed and variable costs stayed the same and the price rose to
£15 per item, what would be the effect on the firm?
• BEP would be lower – have to sell less in order to break even
• BEP would be 500 (£5,000 / 10 = 500)
 Examination Question
WDP Ltd has fixed costs of £2,000 per month. They
sell professional websites for £1,000 and their
variable cost per website is £500.

1. How many websites must they sell each month to

break even? Show your calculations
2. If the fixed costs rose to £2,500 per month, what
would be the effect on the break even point?
Explain in words and show your calculations
3. Presuming that the fixed costs remained at £2,000
and the variable costs remained at £500, explain
how WDP Ltd could lower their break even point.
Explain in words and give an example