1. So do you think Break even graphs are
useful?
Yes
No
They clearly show how
much output a
business needs to
produce / sell
 If current levels ofbb
output is known, you
can see the margin of
safety in units clearly


They take too long
 They are hard to get
the scale correct
 Once you have made
it, you can not just
change the data, if for
example a cost goes
up
Learning Objective 1

2. ESF Year 11 IGCSE
BREAK – EVEN ANALYSIS
CONTRIBUTION METHOD
MR AHERN

3. Learning Objectives
Recap and analyse the use of break even
charts as a tool
 Introduce Break Even contribution method
 Calculate break even through contribution
method
 Complete break even scenario tasks by
using contribution method


4. CALCULATING THE
BREAK – EVEN POINT

There are two ways to calculate the break-even
point.
You have just demonstrated your
competence by producing break-even chart, I’ll
see how good they are over the weekend. I will
want to collect your books at the end of the lesson
But there is also another way…..

The contribution method

5. Advantages to the
method
Contribution
Quite simply its quicker than producing a graph
 If companies sell lots of different products and
have lots of different processes internally such as
ford, it would take up a lot of managers time to
produce a graph every time the supplier price,
demand or production quantity changed.
 Time is money, and manager time is not cheap,
think about it, it could possibly effect the fixed
cost of the product.
 Making it more expensive, and in turn less
competitive


6. Disadvantages of the
contribution method
Limited data.
 Only displays one point, no future inclinations.
 Only determines output in units needed to
break-even
 Doesn’t demonstrate margin of safety
 When altering price, or possibilities of change in
variable costs, this is demonstrated a lot less
clearly.


7. Contribution
Essentially the difference between revenue
(sales) and variable costs.
 For example if a jumper sells at £45 (revenue)
and it costs £12 for the material and £8 for the
logos and designs the variable costs of the jumper
would be £20.
 The contribution per unit would be £25


£45
revenue
-
£20
=
£25
-
V.C.
=
contribution

8. Contribution Method (per unit)
This involves a two part calculation:
Revenue (selling price) per unit – variable cost per unit =
contribution (towards fixed costs).
AND
 Fixed costs / contribution = break-even point.

Learning Objective 2

9. Learning Objectives
Recap and analyse the use of break even
charts as a tool
 Introduce Break Even contribution method
 Calculate break even through contribution
method
 Complete break even scenario tasks by
using contribution method


10. Example
If fixed costs = £5000, variable costs = £12 per unit,
selling Price per unit =£20. Then break-even would be:
Price per unit – variable cost per unit = contribution
(towards fixed costs).
£20 - £12 = £8 (contribution, towards fixed costs)
Fixed costs / contribution = break-even point.
£5000 / 8 = 625
625 products will need to be sold in order to breakeven and cover all their costs.

11. Task

Dave has set up a business to print T-shirts. The
fixed costs of premises and the T-shirt printers
are £6000. The variable costs per T-shirt (the Tshirt, ink, wages) are £10. Each printed T-shirt
sells for £25.
NOW YOU TRY!

12. Task Answer
Dave has set up a business to print T-shirts. The fixed costs of
premises and the T-shirt printers are £6000. The variable costs
per T-shirt (the T-shirt, ink, wages) are £10. Each printed Tshirt sells for £25.
Revenue per unit – Variable Cost Per Unit = Contribution
£25 - £10 = £15 (Contribution per unit)
Fixed Costs / Contribution per unit = Break-even Point.
£6000 / 15 = 400
Dave must sell 400 T-shirts to brake even

13. Task 2

Tina starts a business making and selling shoes
and has the following costs:
Fixed Costs
Variable Costs
Selling Price
£80,000 per year
£25 per pair
£75 pair
Calculate the break-even point?

14. Answer





Revenue – Variable Cost = Contribution
£75- £25 = £50 (Contribution)
Fixed Costs / Contribution = Break-even Point.
£80,000 / £50 = 1600
Tina has to sell 1600 pairs of shoes to brake even.

15. Task 1
Revenue
Variable
Costs
Fixed costs
Item 1
30
18
15,000
Item 2
120
65
95,700
Item 3
315
206
192,712
Item 4
22
19
22,554
Item 5
25.00
12.50
3,750
Item 6
11.50
6.12
3,228
Item 7
116.25
51.16
32,550
Contributi
on
Break-even
(Units)

16. Learning Objectives
Recap and analyse the use of break even
charts as a tool
 Introduce Break Even contribution method
 Calculate break even through contribution
method
 Complete break even scenario tasks by
using contribution method for next lesson


17. OK You have task 2 (the scenarios)
First thing to do here is work out what is a FC
what is a VC and what is R (revenue)
 You can get the answers to this in your book


After doing that you should find the task
relatively easy, well at least to start with

I want to see at least the first one completed
today and the rest handed in next lesson

18. Feedback time
I will give you a post-it
 Please stick them on the board on
your way out with any comments
you have for me
 You do not need to put your name
on these
 And if you leave it blank you can put
it at the top of the board if you
enjoyed the lesson, and the bottom
of the board if you did not.
 If you find it hard please let me
know
