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Starter activity

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start shortly

The break-even level of output is that number of units at

which:

a) Profit is at its highest level

b) Variable costs equal revenue
c) Total costs equal revenue
d) Variable costs equal fixed costs
 Explore Lesson 1

3.3 Costs and break-even analysis

3.3.2 The concept of break-even and calculation of break-even
3.3.3 Interpretation of break-even charts

IGCSE Business

Chapters 28 (231-237)
Learning objectives

To know and understand what break-even charts are

To be able to produce break-even charts

To be able to calculate the break-even output/point

by using a formula
What does the ‘break-even level of output mean’?

The break-even level of output is the quantity (units)

that must be produced (and sold) for total revenue to
equal total costs

• It is also known as the ‘break-even point’

$0 $1,000 $1,000
• Another way to think about it; remember our discussion
about P, TR and TC?
• BUT, the ‘break-even point’ is always Units NOT $£€s
What are break-even charts?

Break-even charts
are graphs which
show how costs
and revenues of a
business change
with sales. They
show the level of
sales the business
must make in order
to break-even.
What does the graph show?

It shows the break-

even point; the level
of sales at which
total cost = total
revenue
On the graph, the
break-even point is
4,000 units.
Anything above BEP
is profit; below is a
loss
 Producing the break-even chart – Step 1

• The first step is to

100
produce two axes:
90
80 • The y-axis (vertical)
Sales and costs (£’000)

70 measures money
60 amounts – costs
50 and revenues
40
• The x-axis
30
20
(horizontal) shows
10
the number of units
0
produced and sold
1 2 3 4 5 6 7 8 9 10
Units of Output (‘000)
 Producing the break-even chart – Step 2

• The next step is to

100 add the fixed costs
90 line
80
• Remember we
Sales and costs (£’000)

70
assume the fixed
60
costs don’t change
50
40
Fixed costs with the level of
30
output
20 • So the fixed costs
10 line is horizontal, in
0
1 2 3 4 5 6 7 8 9 10
red, at £40,000
Units of Output (‘000)
 Producing the break-even chart – Step 3

• Next we add the

variable costs. We
100
assume that variable
90 costs vary directly with
80 output
Sales and costs (£’000)

70
• In our example, the
60
VC per unit is £4. So
50
Fixed costs VCs for 1,000 units
40
will be £4,000and at
30
Variable costs 5,000 units they will
20
be £20,000
10
• Remember, it’s drawn
0
1 2 3 4 5 6 7 8 9 10 as a straight line
Units of Output (‘000)
 Producing the break-even chart – Step 4

• Next we is to add
100 the VC line to the
90
Total costs FC line for each
80 level of output
Sales and costs (£’000)

70
60
• This is important; to
50
calculate the break-
40
Fixed costs even point, we need
30 to know total costs.
Variable costs
20
• The total cost line is
10
shown in green on
0
1 2 3 4 5 6 7 8 9 10 the chart
Units of Output (‘000)
 Producing the break-even chart – Step 5

• Having dealt with the

Total Sales costs, we can now
100 draw the line for total
90
Total costs
sales (revenue)
80
• Remember we are
Sales and costs (£’000)

70
assuming that all
60 output is sold for the
50 same selling price. In
Fixed costs
40 this example £10 per
30 unit
Variable costs
20
• So total sales for
10
2,000 units will be
0
1 2 3 5 6 7 8 9 10
£20,000. Total sales
4
Units of Output (‘000)
line is in blue
 Interpreting the break-even chart – Step 6

Total sales
• The last step is to
100
identify certain
90
information from the
chart
80
Sales and costs (£’000)

70 Total costs • Firstly, the break-even

60 output/point – the
50
point where total sales
40
Fixed costs = total costs; where
30
the green line crosses
Variable costs
20
the blue line.
10 • We can see the break-
0 even point is 6,666
1 2 3 4 5 6 7 8 9 10 units
Units of Output (‘000)
 Interpreting the break-even chart – Step 6

Profits
Total sales
100
• Secondly, from the
90 Losses graph, you can
80 identify where the
Sales and costs (£’000)

70 Total costs business is making

60 profits and where it
50
Fixed costs
is making losses.
40
30
• Below the break-
20
Variable costs
even point is called
10 the loss-making
0 range of output
1 2 3 4 5 6 7 8 9 10
Units of Output (‘000)
 Interpreting the break-even chart – Step 6

• Thirdly, we can
Current
Sales Total sales calculate the
100
8,000Unit margin of safety if
90 we know our
80
current sales and
Sales and costs (£’000)

Total costs
70
the break-even
60
point
50
40
Fixed costs
• In the example,
30
Variable costs
current sales are
20 8,000. Break-even
10 point is 6,666.
0
1 2 3 4 5 6 7 8 9 10 • Margin of Safety =
Units of Output (‘000) 1,334 (yellow line)
Activity- Produce a break-even chart (20 mins)

• Using the following information, produce a break-even

chart (using graph paper for accuracy) for a shoe factory –
Break even chart to be shown on camera.

• Fixed costs are $5000 per year

• Variable cost of each pair of shoes are $3
• Each pair of shoes is sold for a price of $8
• The factory can produce a maximum output of 2000 pair
of shoes per year
Learning objectives

To know and understand what break-even charts are

To be able to produce break-even charts

To be able to calculate the break-even output/point

by using a formula
Learning Platform Resources
All the resources you need to support your Business knowledge can be found on the learning
platform under the relevant week or in the ‘Resources’ area. This could include:
Student Presentation/PowerPoint – you can download this or print it out for your records.
Class worksheets.
Quizzes. You are actively encouraged to make use of these
Video Clips. extra resources to support your own learning
Apply Activities. away from lesson time.

You will also find lots of other useful resources to help support independent study on the
learning platform, these can be found under course resources and include:

Past Papers & Mark Schemes – previous Business papers/mark schemes for you to look at.
Useful Student Documents Module – includes the specification for the course, learning plan
overview and a subject review document.
Useful Website Links Module – links to website about the business world and
revision/teaching of business.
GCSE Pods Library – includes several podcasts about business topics that you can view to
help you understand the subject.
Lesson complete!
See you next lesson
This lesson is being
recorded
Starter activity

Thank you for arriving early, please have a go at the starter activity and the lesson will
start shortly

Which costs do not vary with output?

a) Direct Costs
b) Variable costs
c) Total Costs
d) Fixed Costs
 Explore Lesson 2

3.3 Costs and break-even analysis

3.3.2 The concept of break-even and calculation of break-even
3.3.3 Interpretation of break-even charts

IGCSE Business

Chapters 28 (231-237)
Learning objectives

To know and understand what break-even charts are

To be able to produce break-even charts

To be able to calculate the break-even output/point

by using a formula
What are break-even charts?

Break-even charts
are graphs which
show how costs
and revenues of a
business change
with sales. They
show the level of
sales the business
must make in order
to break-even.
What does the graph show?

It shows the break-

even point; the level
of sales at which
total cost = total
revenue
On the graph, the
break-even point is
4,000 units.
Anything above BEP
is profit; below is a
loss
How can the break-even point be calculated?

The break-even point

(units) can be calculated
two ways:
Activity – Graph paper Required (20 mins)

• Using the
following
information and
graph paper for
accuracy, please
produce a break-
even chart and
answer the
questions
• Your break-even
chart must be
displayed on
camera
Study Tips

• Remember that a lower break-even point is

better than a higher one! This is because it
means that fewer units have to be sold before
the business starts to make a profit

• Break-even analysis is helpful for planning but it

has it limitations.
Week 24 formative apply task

For your Week 24 apply task, you must answer

30 multiple choice questions (MCQs). You
will ONLY have 30 mins to answer the 30
MCQs. The 30 MCQs are from all Units of the
course studied so far. 
You have three (3) attempts and you have the
holiday period to secure the highest mark
possible - good luck!
Learning objectives

To know and understand what break-even charts are

To be able to produce break-even charts

To be able to calculate the break-even output/point

by using a formula
Learning Platform Resources
All the resources you need to support your Business knowledge can be found on the learning
platform under the relevant week or in the ‘Resources’ area. This could include:
Student Presentation/PowerPoint – you can download this or print it out for your records.
Class worksheets.
Quizzes. You are actively encouraged to make use of these
Video Clips. extra resources to support your own learning
Apply Activities. away from lesson time.

You will also find lots of other useful resources to help support independent study on the
learning platform, these can be found under course resources and include:

Past Papers & Mark Schemes – previous Business papers/mark schemes for you to look at.
Useful Student Documents Module – includes the specification for the course, learning plan
overview and a subject review document.
Useful Website Links Module – links to website about the business world and
revision/teaching of business.
GCSE Pods Library – includes several podcasts about business topics that you can view to
help you understand the subject.
Lesson complete!
See you next lesson