Page 228 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 4 Operations management

Once a break-even chart has been produced it can be used to show the eff ect of

changes in the business’s revenue or costs. This could be useful if a business is
consid ering changing its price, or if it knows that it is likely to have a change in
costs. For example, a supplier may increase the price of raw materials it supplies to
the business.

ACTIVITY 16.8

Molly’s first three months of trading have been disappointing. She realises that her price of $2.25 per pizza is more than
competitors in the town. She has decided to reduce the price of her pizzas to $2 each.

1 Use this new price to draw a new revenue line on the graph you prepared earlier. (Remember to recalculate the revenue
at zero and capacity using the new selling price.)
2 How many pizzas must Molly now sell to break-even?
3 What is Molly’s profit at the new price of $2 per pizza?

Benefits Limitations

■ Easy to construct and interpret. ■ Assume that all costs and revenues can be represented by
■ Provide businesses with useful information about the straight lines.
output that must be sold to cover all costs and how ■ It is not easy to separate costs into fixed and variable.

different sales volumes affect the margin of safety ■ Assume that all output is sold – do not allow for inventories

and profitability. and the costs of holding these.
226 ■ Can show the effect of a decision to change costs or

revenues.
■ Can help with other important business decisions such as
the location and relocation of a business.
Table 16.4 Benefits and limitations of break-even charts

TEST YOURSELF
1 What is meant by the term ‘break-even’?
2 State two uses of break-even charts.
3 State one benefit and one limitation of break-even charts.

ACTIVITY 16.9

My Villa Hotel is a budget hotel in Kuala Lumpur, Malaysia. The hotel has 30 rooms. The average rate per room per night is
$45. The hotel is open 50 weeks of the year, seven days a week.
My Villa Hotel has annual fixed costs of $180,000. The variable cost per room per night is $9. In 2012 the hotel had a room
occupancy of 60% (the number of nights rooms had people staying in them). The hotel needs to have 5,000 rooms occupied
per year to break-even.
1 Using appropriate examples, explain the difference between fixed costs and variable costs.

2 My Villa’s weekly capacity is 210 rooms. Calculate its capacity for the year.
3 In 2012 it sold 60% of its total room capacity. Calculate the number of nights the hotel had guests during 2012.
4 To what extent is break-even analysis useful to the owners of My Villa Hotel? Justify your answer.