4. Learning Objectives
By the end of this lesson you should be able to:
1. Understand what is meant by break-even.
2. Calculate contribution per unit of output and total
contribution.
3. Use contribution per unit to calculate the break-
even level of output.
5. What is Break-Even
Using the following key words – construct a
definition for break-even….
A firm will break-even when total revenue
Profit Total Costs
meets total costs. Once achieved the firm will
have the opportunity to make profit.
LO1 Understand what is meant by break-even.
6. Who wants to know about break-
even and why?
Think Pair Share
Write down your Walk around the Share your ideas
reasons. room until the with the rest of
music stops and the group.
share your
ideas.
Owners/ shareholders – can anticipate when the firm will begin making profit.
Banks/ Lenders - will want to know if that the firms figures are realistic or secure.
Investors – want to know the value or worth of the firm.
LO1 Understand what is meant by break-even.
7. Contribution
Contribution – is the difference between sales revenue and
variable costs of production.
What remains goes towards paying for fixed costs.
Contribution towards
paying for fixed costs
Sales Variable
Less =
Revenue Costs Contribution Less Fixed Costs = Profit
LO2 Calculate contribution per unit of output and total contribution.
8. Contribution per unit
Contribution = Selling Price of one unit – Variable Cost of
producing one unit.
Total contribution = Unit Contribution x No. of Units Sold
Profit = Total Contribution – Fixed costs
Why do you think that businesses want to break down costs
in this way?
LO2 Calculate contribution per unit of output and total contribution.
9. Contribution per unit
Important points to remember about contribution per
unit….
It can be increased by raising the selling price.
It can be increased by reducing variable costs.
It is not the same as profit per unit as fixed costs are not
subtracted.
An increase in contribution per unit raises the potential profit
that a business can make.
LO2 Calculate contribution per unit of output and total contribution.
10. Calculating the break-even level
of output
Breaking-even level of output - this is the level of output
or the number of customers that earn enough revenue to
cover costs of production.
Break-even output = Fixed costs
Contribution per unit
What are the benefits of planning to reach a LOW break-
even point?
LO3 Use contribution per unit to calculate the break-even level of output.
11. Calculating the break-even level
of output.
If a printing business pays fixed costs of £500 per week and each
customer earns the business a contribution of £250, how many
customers are needed to pay for fixed costs – and therefore break-
even?
Break-even output = Fixed costs
Contribution per unit
Break-even output = £500 =2
£250
LO3 Use contribution per unit to calculate the break-even level of output.
12. Calculating the break-even level
of output.
Important points to remember calculating the break-even
level of output….
If nothing else changes, a reduction in contribution per customer/
unit will raise the break-even level of output.
If output does not increase then profits will fall.
Calculating break-even output is an easy way of checking the
viability of a new business proposal.
If output seems high then an entrepreneur can consider reducing
fixed costs or raising contribution per unit of output.
LO3 Use contribution per unit to calculate the break-even level of output.
13. Pierre’s Personal T-shirts
Pierre believes that his break-even output may be too
high. With reference to the case study, what would be
the best approaches for him to use in order to reduce
his break-even output? Justify your view.
(15 Marks)
14. Finally….
What is the formula used to calculate
contribution?
Contribution = selling price - variable cost
15. Finally….
What is the formula used to calculate
total contribution?
Total contribution = unit contribution x no. of units sold
16. Finally….
What is the formula used to calculate
profit?
Profit = Total contribution – fixed costs
17. Finally….
What is the formula used to calculate
break-even level of output?
Break-even output = Fixed costs
Contribution per unit
18. Learning Objectives
You should now be able to:
1. Understand what is meant by break-even.
2. Calculate contribution per unit of output and total
contribution.
3. Use contribution per unit to calculate the break-
even level of output.
Students to calculate and write figure on mini whiteboardsAttempt student handoutLooking at changes to the break-even level of output – Video (1.50 – 5.05 mins)
Students to attempt the case study in textbook P81
