Page 227 - Cambridge IGCSE Business Studies

16: Costs, scale of production and break-even analysis

ACTIVITY 16.6

1 On a piece of graph paper:
a Draw and label:
i the x axis from 0 to 800, labelled ‘Output and sales of pizzas’.
ii the y axis from $0 to $2,000, labelled ‘Cost and revenue’.
Make sure you use an appropriate scale for both axes.
b Plot the revenue at zero output and capacity output. Use a ruler to join these two points together.
c Repeat for both the total costs and fixed costs data.

Your chart should look similar to the one shown in Figure 16.6.
2 Now that you have a break-even chart for Molly’s business, you can use this to work out how many pizzas she needs to
sell each week for her business to break-even. This will be where the revenue line crosses the total cost line.
a Mark this on your chart as the break-even point.
b Using a ruler, draw a line down from the break-even point to the x axis and read off the value of the break-even

output/sales.

If you have drawn your chart correctly you should have a
break-even output of 400 pizzas per week.

Now draw a line from the break-even point to the y axis.

c Read off the value for the revenue and total costs at break-even. 225

If you have done this correctly you should have an answer of
$1,000.

So, we can say that Molly needs to sell 400 pizzas per week to break-even. Remember,
at this output she will not make a profit, but nor will she be making a loss.

Now that we have the break-even chart for Molly’s business we can use it to

calculate her profit and margin of safety at different sales levels.

ACTIVITY 16.7

You are now going to use your break-even chart to calculate Molly’s weekly forecast profit based on sales of 600 pizzas.

1 Draw a vertical line from an output/sales level of 600 to meet the total costs line. Draw a line across to the y axis and read
off the value for total costs at an output level of 600 pizzas.

2 Continue your vertical line from an output/sales of 600 pizzas to the revenue line. Draw a line across to the y axis and
read of the value for revenue at a sales level of 600 pizzas.
3 Deduct the total costs figure from the revenue figure to calculate Molly’s profit at a sales level of 600 pizzas per week.
4 Use your break-even chart to calculate Molly’s weekly profit if she only sells 500 pizzas per week.