Calculating Break-Even (AQA A Level Business): Revision Note

Selected cost and revenue data for Cannock Chase Glamping

Using the information in the table, calculate how many pods need to be occupied each month for Cannock Chase Glamping to break even

[4]

Answer:

Step 1: State the formula to calculate the breakeven point

$\mathrm{Break}\mathrm{Even}\mathrm{Point}=\frac{\mathrm{Fixed}\mathrm{Costs}}{\mathrm{Contribution}\mathrm{per}\mathrm{unit}}$          (1)

Step 2: Calculate the contribution

$$\begin{gathered} \mathrm{Contribution}=\mathrm{Selling}\mathrm{price}-\mathrm{Variable}\mathrm{cost}\mathrm{per}\mathrm{unit} \\ =\pounds 95-\pounds 19 \\ =\pounds 76 \end{gathered}$$(1)

Step 3: Apply the formula to calculate the breakeven point

$$\begin{gathered} =\frac{\pounds 55,000}{\pounds 76} \\ =723.68 \end{gathered}$$   (1)

Step 4: Always round UP to the nearest whole number because only whole products can be sold

$$\begin{gathered} 723.68 \\ =724\mathrm{camping}\mathrm{pods} \end{gathered}$$    (1)

The cost, sales and revenue for an electric bicycle manufacturer are presented in the table below

Using the data, calculate the margin of safety. You are advised to show your workings 

[3]

Answer:

Step 1: Calculate the contribution

$$\begin{gathered} \mathrm{Contribution}=\mathrm{Selling}\mathrm{price}-\mathrm{Variable}\mathrm{cost}\mathrm{per}\mathrm{unit} \\ =\pounds 750-\pounds 350 \\ =\pounds 400 \end{gathered}$$ (1)

Step 2: Apply the formula to calculate the breakeven point

$$\begin{gathered} =\frac{\pounds 42,000}{\pounds 400} \\ -105\mathrm{units} \end{gathered}$$  (1)

Step 3: Apply the formula to calculate the margin of safety

$$\begin{gathered} =240\mathrm{units}-105\mathrm{units} \\ =135\mathrm{units} \end{gathered}$$   (1)

Treetops is an outdoor activity centre. In 2024, it earned revenue of £462,540, with fixed costs of £281,720 and total variable costs of £131,280

Calculate the total profit made by Treetops in 2024

[3]

Answer:

Step 1: Calculate the total contribution

$$\begin{gathered} \mathrm{Total}\mathrm{contribution}=\mathrm{Revenue}-\mathrm{Total}\mathrm{variable}\mathrm{costs} \\ =\pounds 462,540-\pounds 131,280 \\ =\pounds 331,260 \end{gathered}$$ (1)

Step 2: Use the contribution figure to calculate profit

$$\begin{gathered} \mathrm{Profit}\left(\mathrm{Loss}\right)=\mathrm{Total}\mathrm{contribution}-\mathrm{Total}\mathrm{fixed}\mathrm{costs} \\ =\pounds 331,260-\pounds 281,720 \\ =\pounds 49,540 \end{gathered}$$ (1)

• Treetops made a profit of £49,540 in 2024 (1)

PART 1: An increase in the selling price

Roleplay Rascals is an indoor play centre for preschool children. It currently charges £11 per child per play session. It incurs monthly fixed costs of £8,200, and each play session costs £2.30 on average per child. On average, 1,400 play sessions are sold each month

Calculate the impact on Roleplay Rascals' breakeven point if the selling price per play session is increased by £1

[4]

Answer:

Step 1: Calculate the current breakeven point

$$\begin{gathered} \mathrm{BEP}=\frac{\mathrm{Fixed}\mathrm{costs}}{\mathrm{Contribution}} \\ =\frac{\pounds 8,200}{\pounds 11-\pounds 2.30} \\ =\frac{\pounds 8,200}{\pounds 8.70} \\ =943\mathrm{play}\mathrm{sessions} \end{gathered}$$ (1)

Step 2: Calculate the new breakeven point

$$\begin{gathered} =\frac{\pounds 8,200}{\pounds 12-\pounds 2.30} \\ =\frac{\pounds 8,200}{\pounds 9.70} \\ =846\mathrm{play}\mathrm{sessions} \end{gathered}$$ (1)

Step 3: Calculate the change

$$\begin{gathered} =943\mathrm{play}\mathrm{sessions}-846\mathrm{play}\mathrm{sessions} \\ =97\mathrm{play}\mathrm{sessions} \end{gathered}$$ (1)

• The breakeven point falls by 97 units (1)

PART 2: An increase in staffing costs

Following the price increase, fixed costs rise to £9,600 when a new staff member is appointed

Calculate the impact on Roleplay Rascals' breakeven point given this increase in staffing costs

[3]

Answer:

Step 1: Calculate the new breakeven point

$$\begin{gathered} \mathrm{BEP}=\frac{\mathrm{Fixed}\mathrm{costs}}{\mathrm{Contribution}} \\ =\frac{\pounds 9,600}{\pounds 12-\pounds 2.30} \\ =\frac{\pounds 9,600}{\pounds 9.70} \\ =990\mathrm{play}\mathrm{sessions} \end{gathered}$$ (1)

Step 2: Calculate the change

$$\begin{gathered} =990\mathrm{play}\mathrm{sessions}-846\mathrm{play}\mathrm{sessions} \\ =144\mathrm{play}\mathrm{sessions} \end{gathered}$$ (1)

• The breakeven point rises by 144 units (1)

PART 3: A decrease in variable costs

Roleplay Rascals' manager shops around for a better deal on drawing and painting supplies. This reduces the variable costs by 20%

Calculate the impact on Roleplay Rascals' breakeven point given this reduction in variable costs

[4]

Answer:

Step 1: Calculate the new variable cost per unit

$$\begin{gathered} =\pounds 2.30\times 0.2 \\ =\pounds 0.46 \\ =\pounds 2.30=\pounds 0.46 \\ =\pounds 1.84 \end{gathered}$$ (1)

Step 2: Calculate the new breakeven point

$$\begin{gathered} \mathrm{BEP}=\frac{\mathrm{Fixed}\mathrm{costs}}{\mathrm{Contribution}} \\ =\frac{\pounds 9,600}{\pounds 12-\pounds 1.84} \\ =\frac{\pounds 9,600}{\pounds 10.16} \\ =945\mathrm{play}\mathrm{sessions} \end{gathered}$$ (1)

Step 3: Calculate the change

$$\begin{gathered} =990\mathrm{play}\mathrm{sessions}-945\mathrm{play}\mathrm{sessions} \\ =45\mathrm{play}\mathrm{sessions} \end{gathered}$$ (1)

• The breakeven point falls by 45 units (1)