Task 2 B Business Plan : Break Even Analysis

Business Plan : Break Even Analysis

There are three ways to do this:
1- create a graph as you did in unit 3 p5
2- use the break even formula as you did in unit 3 p4
3- from your cash flow forecast work out when your income meets expenditure.



1- create a graph as you did in unit 3 p5                                                                                                                                  You need the following equipment to complete this task: A4 graph paper, a ruler, a sharp pencil and an eraser






Important information that you need to calculate to do this

• • Fixed costs: These don’t change with use e.g. rent and salary. Add them together, for the sake of your sanity I suggest that you consider utilities and other expenses (not stock) as fixed costs.
  • Variable costs (per unit) For a one product business this is simple x the number of units by the price you paid for them. For a multiple product business see here.
  • Selling price per unit: One way of doing this is to add 25% to the variable cost price to cover your VC’s
  • Maximum sales: The number of items that you have to sell from your VC calculation. This might be based on the maximum you can afford to buy: Such as if you had a budget of £10,000.00 to buy £500.00 items your max sales in a period would be 20.Or it might be based on what you could physically do: Such as if you were a school photographer you would only be able to visit one school a day and be able to visit 5 in a week etc.

What to do

1. You need to calculate your maximum revenue based on the figures above and work out a scale for representing this on a graph. (Starting at 0 you should go up in a sensible amount )

2. On a piece of graph paper long side horizontally draw a vertical axis. This will represent your costs and income. (Remember to do this based on the calculations above and start at 0)

3. Label this axis costs and revenue

4. Draw a horizontal axis that will represent your total sales.

5. Label this axis units sold.

6. Draw a horizontal line at the point where fixed costs occur

7. Label this fixed costs.

8. Calculate total costs (total fixed costs + total variable costs)

9. Using fixed costs as a starting point and ending at the point where maximum sales and revenue can occur draw a line for your total costs

10. Calculate your total possible revenue based on total units x selling price

11. Mark the point at which maximum units sold and maximum revenue meet.

12. Using a pencil and a ruler draw a line from no sales to the mark made previously.

13. Label this line total revenue.

14. The point at which TC and TR meet is your break-even point.

15. Make sure that all lines are labelled.

16. Use this formula to check your work:

Break even = total fixed costs

                         Selling price – variable cost


2- use the break even formula as you did in unit 3 p4

You need to calculate the following

• Fixed costs: These don’t change with use e.g. rent and salary. Add them together, for the sake of your sanity I suggest that you consider utilities and other expenses (not stock) as fixed costs.
• Variable costs (per unit) For a one product business this is simple x the number of units by the price you paid for them. For a multiple product business see here.
• Selling price per unit: One way of doing this is to add 25% to the variable cost price to cover your VC’s
• Maximum sales: The number of items that you have to sell from your VC calculation. This might be based on the maximum you can afford to buy: Such as if you had a budget of £10,000.00 to buy £500.00 items your max sales in a period would be 20.Or it might be based on what you could physically do: Such as if you were a school photographer you would only be able to visit one school a day and be able to visit 5 in a week etc.

Then use this formula to work out how many units you will need to sell to break even.

Break even = total fixed costs

                                     Selling price – variable cost

example:  TFC = 10,000

                      SP = 50.00

                       VC = 20.00

10,000 divided by 50.00 - 20.00 = 180 units

3- from your cash flow forecast work out when your income meets expenditure.

You will need to look at your cash flow forecast and you should be able to see when you will break even. This is less accurate than the first two methods as it is based on what you think will happen rather than what will definitely happen.