1 Calculating a break-even point • Calculate the break-even quantity, profit and margin of safety • Use these methods to analyse the effects of changes in price or cost on break-even, profit and margin of safety HL • Calculate the required output level for a given target revenue or profit HL • Analyse the assumptions and limitations of break- even analysis HL
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1 Calculating a break-even point Calculate the break-even quantity, profit and margin of safety Use these methods to analyse the effects of changes in.
3 The basics of break-even analysis Businesses must make a profit to survive To make a profit, income must be higher than expenditure (or costs) Income$50,000 Costs $40,000 Profit $10,000 Income$50,000 Costs $60,000 Loss $10,000
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Calculating a break-even point
• Calculate the break-even quantity, profit and margin of safety
• Use these methods to analyse the effects of changes in price or cost on break-even, profit and margin of safety HL
• Calculate the required output level for a given target revenue or profit HL
• Analyse the assumptions and limitations of break-even analysis HL
Change in price Changes in fixed costs Changes in variable costs.
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Changes in variables
Change in price
Changes in fixed costs
Changes in variable costs.
Tom's ice creams
050
100150200250300350400450
0 100 200 300
Number sold
Cos
t/Rev
enue
£
Sales Revenue
Total Cost
Fixed Cost
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Other uses of a Breakeven graph:
Target rate of profit – calculate the amount of output needed to generate a certain amount of profit.
Tom's ice creams
050
100150200250300350400450
0 100 200 300
Number sold
Cos
t/Rev
enue
£
Sales Revenue
Total Cost
Fixed Cost
20
Further uses of a Breakeven graph (HL) pg 338
Breakeven – price May want to know how much to
charge for its product to break-even.
To do this a business must know how much it is going to product to sell.
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Other uses of a Breakeven graph:
Price needed to reach a target rate of profit.
Target Revenue & Profit
Pg 339
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Break-Even Revenue
Pg 339
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What is the Breakeven point?
Define…….
Do use the term in your answer as it helps you to
focus…..
In a question HIGHLIGHT key words and any answers.It is QUALITY not Quantity.
Break-even and the Dome 3.2
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1. What is mean by Breakeven? (2)
Answers may include: When the level of input equals the level of output.
C2 Ap 3 An3 Content 2 marks Good understanding 1 mark Some understanding 0 marks No relevant content points made.
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2. Examine two ways to reduce the breakeven point.(8) Answers may include: Cut costs (fixed/variable) - but must consider
effect on qualityIncrease selling price – but consider effect on sales!
C2 An3 En3 Content 2 marks Two or more points made and explained 1 mark Relevant content made but not developed or one point made
and explained 0 marks No relevant content points made. Analysis 3 marks Good analysis of issues 2 – 1 mark Limited analysis of issues 0 marks No analysis of issues demonstrated Evaluate 3 marks Good judgement of relevant issues 2-1 marks Limited judgement shown of relevant issues 0 marks No judgement of relevant issues.
C□An□E□
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3. Discus the limitations of using Breakeven analysis (12) Answers may include: simplistic e.g all units sold at one price); data may be out of date/
assumes what is made is sold; does not take into account competition e.g price cut; doesn’t consider economy of scale; prices always changing (won’t stay valid for long);accuracy of data.
C2 Ap 2 An4 E 4 Content 2 marks Two or more points made and explained 1 mark Relevant content made but not developed or one point made and explained 0 marks No relevant content points made. Application 2 marks Points effectively applied to the case 1 mark An attempt to apply knowledge to the case 0 marks No attempt at application Analysis 4 – 3 marks Good analysis of issues 2 – 1 mark Limited analysis of issues 0 marks No analysis of issues demonstrated Evaluate 4 - 3 marks Good judgement of relevant issues 2-1 marks Limited judgement shown of relevant issues 0 marks No judgement of relevant issues. C□Ap□An□E□
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2. Two actions to take to reach the original target of 12 million customers per year.(6) Answers may include: increase promotion to boost sales (two
for one); Increase advertising; better public relations. C2 Ap 2 An2 Content 2 marks Two or more points made and explained 1 mark Relevant content made but not developed or one point
made and explained 0 marks No relevant content points made. Application 2 marks Points effectively applied to the case 1 mark An attempt to apply knowledge to the case 0 marks No attempt at application Analysis 2 marks Good analysis of issues 1 mark Limited analysis of issues 0 marks No analysis of issues demonstrated C□Ap□An□