Revise the formulas that relate to contribution and break-even analysis

Do Now!

What is the formula used to calculate contribution?

Contribution = selling price - variable cost

Do Now

What is the formula used to calculate total contribution?

Total contribution = unit contribution x no. of units sold

Do Now

What is the formula used to calculate profit?

Profit = Total contribution – fixed costs

Do Now

What is the formula used to calculate break-even level of

output?

Break-even output = Fixed costs Contribution per

unit

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

DO NOW

Answers:Contribution per unit: £15 - £5 = £10

Break-even level of output: £15,000 = 1500 cakes

£10

DO NOW

Break-Even Analysis (Part 2)

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

Learning Objectives

Strengths and weaknesses of break-even

analysis

Half 1

Produce a list of 5 strengths of break-even analysis

Reduce this to your top 2

LO4 Evaluate the strengths and weaknesses of break-even analysis

Half 2

Produce a list of 5 weaknesses of break-even analysis

Reduce this to your top 2

Strengths and weaknesses of break-even

analysis

Strengths

1. Simple and easy to understand by most entrepreneurs

2. Vital for decision making

3. Support loan applications

4. Adapted to changing circumstances

LO4 Evaluate the strengths and weaknesses of break-even analysis

Weaknesses

1. Assumes all output is sold

2. Firms may sell more than one product

3. Assumes steady and consistent costs

4. Not definite – planning aid

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

Learning Objectives