Business Profits & Break-Even Analysis

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Profit, Average Unit Cost and Interest

Profit is the amount of money that the business makes, when taking into account costs. It is in effect, a surplus.

Profit

Profit = total revenue – total costs.
- This is a simple and yet very important formula.
- If revenue is greater than costs, a company will make a profit.
- If costs are greater than revenue, a company will make a loss.

Average unit cost

Average unit cost = total cost ÷ output (total number of units produced).
- This gives a business an idea of what price they need to charge.
- In order to make a profit on each item, they need to charge a price that is more than the average unit cost.

Interest

When you borrow money, you usually pay back more than you borrowed. This extra amount is known as the interest on the loan and it is the percentage of the loan that is charged as extra.
Interest = interest rate x the size of the loan.
- So, if a business borrows £200 at an interest rate of 5%. Then the interest they pay on the loan each year is 200 x 0.05 = £10.

Break-Even Analysis

The break-even point is the amount of sales when a business’ revenue is equal to the total costs of a business. At this point, the business is not making a profit or a loss.

Break-even analysis

If the business sells more than the break-even level of output then it will make a profit and if it sells less, it will make a loss.
Businesses use this to calculate the output needed to make a profit.
The break-even level of output is the level of output at which the firm’s revenue is equal to the total costs.
Break-even analysis can be shown by a break-even chart which shows total costs, revenue and profit on the y-axis and output on the x-axis.

Margin of safety

Margin of safety is how much output (or predicted output) would have to fall by until the business reached the break-even level of output.
The margin of safety is the gap between the actual output and the break-even point.

Analysing projects

Knowing the break-even point is helpful when analysing investment projects.
- E.g. if Cadbury were launching a new chocolate bar, they could use break-even analysis on the new chocolate bar and then compare that to the predictions of how much they think they will sell.

Limitations to break-even analysis

Break-even analysis makes some assumptions that may not be accurate in reality.
- Assumes the firm will be able to sell all of the units that it produces.
- Assumes the firm would not have to change the price when output changes.

1Enterprise & Entrepreneurship

1.1The Dynamic Nature of Businesses

1.1.1The Dynamic Nature of Businesses

1.1.2Risk & Reward

1.1.3The Role of Business Enterprise

1.1.4The Role of Business Enterprise 2

1.1.5The Role of the Entrepreneur

1.1.6End of Topic Test - Dynamic Nature of Business

1.1.7Grade 9 - Dynamic Nature of Business

1.2Spotting a Business Opportunity

1.2.1Customer Needs

1.2.2Market Research

1.2.3Market Segmentation

1.2.4The Competitive Environment

1.2.5Primary & Secondary Market Research

1.2.6End of Topic Test - Business Opportunities

1.2.7Application Questions - Business Opportunities

1.2.8Exam-Style Questions - Market Segmentation

1.3Putting a Business Idea into Practice

1.3.1Business Aims

1.3.2Business Objectives

1.3.3Business Revenues & Costs

1.3.4Costs - Calculations

1.3.5Revenue - Calculations

1.3.6Business Profits & Break-Even Analysis

1.3.7Profits & Losses - Calculations

1.3.8Interest - Calculations

1.3.9Cash & Cash Flow

1.3.10Cash & Cash Flow 2

1.3.11Cash Flow - Calculations

1.3.12Sources of Business Finance

1.3.13End of Topic Test - Business in Practice

1.3.14Grade 9 - Business in Practice

1.3.15Exam-Style Questions - Business in Practice

1.4Making the Business Effective

1.4.1The Options for Start-Up & Small Businesses

1.4.2Limited Liability

1.4.3Franchising & Not-For-Profits

1.4.4Business Location

1.4.5The Marketing Mix

1.4.6Business Plans

1.4.7End of Topic Test - Effective Business

1.4.8Application Questions - Effective Business

1.4.9Exam-Style Questions - Business Plans

1.5Business Stakeholders

1.5.1Business Stakeholders

1.5.2Technology & Business

1.5.3Legislation & Business

1.5.4Legislation & Business 2

1.5.5The Economy & Business

1.5.6External Influences

1.5.7End of Topic Test - Business Stakeholders

1.5.8Grade 9 - Business Stakeholders

2Building a Business

2.1Growing the Business

2.1.1Business Growth

2.1.2Finance

2.1.3Changes in Business Aims & Globalisation

2.1.4Ethics & Business

2.1.5The Environment & Business

2.1.6End of Topic Test - Growing a Business

2.1.7Application Questions - Growing a Business

2.1.8Exam-Style Questions - Business Growth

2.2Making Marketing Decisions

2.2.1Product

2.2.2Product Life Cycle

2.2.3Price

2.2.4Pricing Methods

2.2.5End of Topic Test - Product & Price

2.2.6Grade 9 - Product & Price

2.2.7Promotion & Advertising

2.2.8PR & Sales Promotions

2.2.9Sponsorship & Product Placement

2.2.10Promotional Mix

2.2.11End of Topic Test - Promotion

2.2.12Application Questions - Promotion

2.2.13Exam-Style Questions - Promotional Mix

2.2.14Place & Wholesalers

2.2.15Direct to Consumer

2.2.16E-commerce & M-commerce

2.3Making Operational Decisions

2.3.1Job Production

2.3.2Batch & Flow Production

2.3.3Working with Suppliers

2.3.4Effective Supply Chains

2.3.5Just In Time & Just In Case

2.3.6Managing Quality

2.3.7Total Quality Management

2.3.8The Sales Process

2.3.9End of Topic Test - Operational Decisions

2.3.10Grade 9 - Operational Decisions

2.3.11Exam-Style Questions - Managing Stock

2.4Making Financial Decisions

2.4.1Gross Profit & Net Profit - Definitions

2.4.2Gross Profit - Calculations

2.4.3Net Profit - Calculations

2.4.4Rate of Return

2.4.5Rate of Return - Calculations

2.4.6Research & Financial Data

2.4.7Marketing Data

2.4.8Percentage Change - Calculations

2.5Making Human Resource Decisions

2.5.1Organisational Structures

2.5.2Organisational Structures 2

2.5.3Recruitment

2.5.4Effective Recruitment

2.5.5Training a Workforce

2.5.6Motivating a Workforce

2.5.7End of Topic Tests - Human Resources

2.5.8Application Questions - Human Resources

2.5.9Exam-Style Questions - Human Resources

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