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3.2 Break-Even Analysis – Unit 3: Investigating Financial Control

Unit 3: Investigating Financial Control

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3.2 Break-Even Analysis

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Contents

Teacher’s notes included in the Notes Page

Flash activity (these activities are not editable) Sound

Printable activity

Key skills

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For more detailed instructions, see the Getting Started presentation

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Using break-even analysis

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Putting knowledge into practice: Suzy’s driving school case study

How businesses use break-even analysis

In this section, you will learn more about how businesses use break-even analysis.

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How businesses use break-even analysis

Businesses can use break-even analysis to find the answer to numerous questions related to costs and revenue.

If we raise the price of our product and sales fall as a result, will we

still be making a profit?

If our rent went up, what effect would this

have on profits?

If we opted for a cheaper, but lower

quality supplier, would our sales be affected?

Businesses can work out the answers to these – and many more – questions quickly and easily by drawing a break-even chart or using the formula.

For example:

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Case study: Suzy’s driving school

Suzy Brown owns her own driving school. Currently, she charges £30 a lesson and teaches an average of 120 lessons a month.

What is Suzy’s monthly revenue if she teaches 120 lessons and charges £30 for each?

Suzy is keen to work out the effect that changing her costs and revenue might have on her business’s finances.

The information provided on the next few slides will enable you to help her do this.

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Fixed cost or variable cost?

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Suzy’s costs

What are Suzy’s total fixed costs per month?

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Assignment: Suzy’s driving school

Suzy’s driving school break-even analysis

1) Using the figures you have for the driving school, calculate how many lessons Suzy must teach a month to break even.

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3) What would be the effect on the business if:

2) What is Suzy’s margin of safety if she teaches 120 lessons a month? How about if she teaches 130?

Suzy lowered her prices to £25 a lesson?

Suzy raised her prices to £35 a lesson?

Advertising costs went up to £80 a month?

4) Suzy wants to make more money. What do you think the best way to do this would be? Discuss your ideas as a class.

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Break-even words

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Build the business!

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Glossary