1.3.6

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

  • 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

  • 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

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

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

  • 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

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

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.
Jump to other topics
1

Investigating Small Business

1.1

Enterprise & Entrepreneurship

1.1.1The Dynamic Nature of Businesses1.1.2Risk & Reward1.1.3The Role of Business Enterprise1.1.4The Role of Business Enterprise 21.1.5The Role of the Entrepreneur1.1.6End of Topic Test - Dynamic Nature of Business1.1.7Grade 9 - Dynamic Nature of Business
1.2

Spotting a Business Opportunity

1.2.1Customer Needs1.2.2Market Research1.2.3Market Segmentation1.2.4The Competitive Environment1.2.5Primary & Secondary Market Research1.2.6End of Topic Test - Business Opportunities1.2.7Application Questions - Business Opportunities1.2.8Exam-Style Questions - Market Segmentation1.2.9Diagnostic Misconceptions - Competition
1.3

Putting a Business Idea into Practice

1.3.1Business Aims1.3.2Business Objectives1.3.3Business Revenues & Costs1.3.4Costs - Calculations1.3.5Revenue - Calculations1.3.6Business Profits & Break-Even Analysis1.3.7Profits & Losses - Calculations1.3.8Interest - Calculations1.3.9Cash & Cash Flow1.3.10Cash & Cash Flow 21.3.11Cash Flow - Calculations1.3.12Sources of Business Finance1.3.13End of Topic Test - Business in Practice1.3.14Grade 9 - Business in Practice1.3.15Exam-Style Questions - Business in Practice1.3.16Diagnostic Misconceptions - Profit1.3.17Diagnostic Misconceptions - Company vs Business1.3.18Diagnostic Misconceptions - Economies of Scale1.3.19Diagnostic Misconceptions - Cash Flow1.3.20Diagnostic Misconceptions - Break-even1.3.21Diagnostic Misconceptions - Fixed Costs
1.4

Making the Business Effective

1.4.1The Options for Start-Up & Small Businesses1.4.2Limited Liability1.4.3Franchising & Not-For-Profits1.4.4Business Location1.4.5The Marketing Mix1.4.6Business Plans1.4.7End of Topic Test - Effective Business1.4.8Application Questions - Effective Business1.4.9Exam-Style Questions - Business Plans
1.5

Business Stakeholders

1.5.1Business Stakeholders1.5.2Technology & Business1.5.3Legislation & Business1.5.4Legislation & Business 21.5.5The Economy & Business1.5.6External Influences1.5.7End of Topic Test - Business Stakeholders1.5.8Grade 9 - Business Stakeholders1.5.9Diagnostic Misconceptions - Recessions
2

Building a Business

2.1

Growing the Business

2.1.1Business Growth2.1.2Finance2.1.3Changes in Business Aims & Globalisation2.1.4Ethics & Business2.1.5The Environment & Business2.1.6End of Topic Test - Growing a Business2.1.7Application Questions - Growing a Business2.1.8Exam-Style Questions - Business Growth
2.2

Making Marketing Decisions

2.2.1Product2.2.2Product Life Cycle2.2.3Price2.2.4Pricing Methods2.2.5End of Topic Test - Product & Price2.2.6Grade 9 - Product & Price2.2.7Promotion & Advertising2.2.8PR & Sales Promotions2.2.9Sponsorship & Product Placement2.2.10Promotional Mix2.2.11End of Topic Test - Promotion2.2.12Application Questions - Promotion2.2.13Exam-Style Questions - Promotional Mix2.2.14Place & Wholesalers2.2.15Direct to Consumer2.2.16E-commerce & M-commerce2.2.17Diagnostic Misconceptions - Decreasing Price2.2.18Diagnostic Misconceptions - Advertise vs Promote2.2.19Diagnostic Misconceptions - Social Media
2.3

Making Operational Decisions

2.3.1Job Production2.3.2Batch & Flow Production2.3.3Working with Suppliers2.3.4Effective Supply Chains2.3.5Just In Time & Just In Case2.3.6Managing Quality2.3.7Total Quality Management2.3.8The Sales Process2.3.9End of Topic Test - Operational Decisions2.3.10Grade 9 - Operational Decisions2.3.11Exam-Style Questions - Managing Stock2.3.12Diagnostic Misconceptions - JIT vs JIC
2.4

Making Financial Decisions

2.4.1Gross Profit & Net Profit - Definitions2.4.2Gross Profit - Calculations2.4.3Net Profit - Calculations2.4.4Rate of Return2.4.5Rate of Return - Calculations2.4.6Research & Financial Data2.4.7Marketing Data2.4.8Percentage Change - Calculations
2.5

Making Human Resource Decisions

2.5.1Organisational Structures2.5.2Organisational Structures 22.5.3Recruitment2.5.4Effective Recruitment2.5.5Training a Workforce2.5.6Motivating a Workforce2.5.7End of Topic Tests - Human Resources2.5.8Application Questions - Human Resources2.5.9Exam-Style Questions - Human Resources2.5.10Diagnostic Misconceptions - Owners vs Shareholders2.5.11Diagnostic Misconceptions - Internal Recruitment2.5.12Diagnostic Misconceptions - Employee Motivation

Practice questions on Business Profits & Break-Even Analysis

Can you answer these? Test yourself with free interactive practice on Seneca — used by over 10 million students.

  1. 1
    What is the equation for profit?Multiple choice
  2. 2
    If a hot dog van has a total cost of £1500 and produces an output of 750 hotdogs, what is the average unit cost of 1 hot dog?Multiple choice
  3. 3
    If a business borrows a loan of £9,000 at an interest rate of 2%, how much interest will they pay on the loan each year?Multiple choice
  4. 4
    What is the break-even point?Multiple choice
  5. 5
    If a sweatshirt company has a total cost of £5,000 and they sell each jumper they make for £20, how many jumpers will they need to sell to break-even?Multiple choice
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Revenue - Calculations

Profits & Losses - Calculations