1. Do Now!
Revise the formulas
that relate to
contribution and
break-even analysis
2. Do Now
What is the formula used to calculate
contribution?
Contribution = selling price - variable cost
3. Do Now
What is the formula used to calculate
total contribution?
Total contribution = unit contribution x no. of units sold
4. Do Now
What is the formula used to calculate
profit?
Profit = Total contribution – fixed costs
5. Do Now
What is the formula used to calculate
break-even level of output?
Break-even output = Fixed costs
Contribution per unit
6. DO NOW
Calculate this example:
A firm selling birthday cakes has total fixed costs of £15,000.
The variable cost of each cake is £5 and the selling price is £15.
What is the break-even level of output?
Clue: You should calculate contribution per unit first
7. DO NOW
Answers:
Contribution per unit: £15 - £5 = £10
Break-even level of output: £15,000 = 1500 cakes
£10
9. Learning Objectives
By the end of this lesson you should be able to:
1. Construct break-even charts.
2. Show the effects of changing costs and prices on contribution
per unit, break-even charts and the break-even level of output
3. Use these concepts to assist an entrepreneur in deciding
whether to start a new business or not
4. Evaluate the strengths and weaknesses of break-even analysis
10. Strengths and weaknesses of
break-even analysis
Half 1 Half 2
Produce a list of 5 Produce a list of 5
strengths of break-even weaknesses of break-
analysis even analysis
Reduce this to your top 2 Reduce this to your top 2
LO4 Evaluate the strengths and weaknesses of break-even analysis
11. Strengths and weaknesses of
break-even analysis
Strengths Weaknesses
1. Simple and easy to 1. Assumes all output is sold
understand by most 2. Firms may sell more than
entrepreneurs one product
2. Vital for decision making 3. Assumes steady and
3. Support loan applications consistent costs
4. Adapted to changing 4. Not definite – planning aid
circumstances
LO4 Evaluate the strengths and weaknesses of break-even analysis
12. Learning Objectives
You should now be able to:
1. Construct break-even charts.
2. Show the effects of changing costs and prices on contribution
per unit, break-even charts and the break-even level of output
3. Use these concepts to assist an entrepreneur in deciding
whether to start a new business or not
4. Evaluate the strengths and weaknesses of break-even analysis
