Edexcel IAL Business notes, free for every unit

2.3.2 · 3eInterpreting a break-even chart

The revenue line starts at the origin. Nothing sold is nothing earned, so at zero output revenue is zero. It rises by $6 for every case.

The total cost line starts at the fixed costs. At zero output the plant still owes $36,000, so the line begins at $36,000 on the money axis and rises by $3.60 a case — more gently than the revenue line, which is why they meet.

They cross at the break-even point, 15,000 cases and $90,000. Left of the crossing revenue is below costs and the vertical gap is a loss; right of it the gap is a profit. At 20,000 cases the gap is $120,000 − $108,000 = $12,000, which is the profit read straight off the chart.

The margin of safety is on the output axis, not in the money: the distance from 15,000 to 20,000. Two different questions, read in two different directions.

3eInterpretation of break-even charts

• The chart: output on the horizontal axis and costs and revenue in $ on the vertical axis. The fixed costs line is horizontal, the total costs line starts at the fixed costs and slopes upward, and the total revenue line starts at the origin.

• (2)Define the term 'margin of safety'.

  How to earn the marks

  Two marks means two separate things to say and the second is not a rewording of the first. Before you write, settle what KIND of quantity this is — the commonest loss of a mark here is answering in money when the term is measured in something else.

• (4)Calculateg plant has fixed costs of $36,000 a month and a variable cost of $3.60 a case. Calculate its total cost and its average cost at an output of 25,000 cases.

  How to earn the marks

  Two figures are wanted and the second is built out of the first, so do them in order and label both. Appendix 6 says a Calculate requires workings to be shown, and here the workings are where the marks are — decide which total you need before you divide anything.

• (4)Explaining plant is launching a flavour that has never been sold in its region. Explain one difficulty it will face in forecasting sales of the new flavour.

  How to earn the marks

  One difficulty, explained — not a list. Appendix 6 defines Explain as requiring a brief explanation of cause or effect supported by details or an example, so the shape is a named difficulty, the reason it arises HERE, and what it does to the forecast. Choose the difficulty that the words "never been sold in its region" are pointing at.

• (4)Calculateg plant sells at $6 a case with a variable cost of $3.60 a case and fixed costs of $36,000 a month. Calculate its break-even point, and calculate the new break-even point if the variable cost rises to $4.

  How to earn the marks

  Two break-even points, and the second is the first done again with one figure changed. Appendix 6 requires workings, and on this question the working that matters is the line before the division — get that wrong and both answers are wrong together. Note which of the three given figures actually moves.

• (4)Constructpens month 1 with $30,000. It expects receipts of $72,000, $120,000 and $129,600 and payments of $108,000, $122,400 and $108,000 over three months. Construct a cash-flow forecast showing net cash flow and the closing balance for each month.

  How to earn the marks

  Appendix 6 defines Construct as requiring an accurately labelled diagram, so the labels are part of what is being asked rather than decoration on top of it. Set the table out before you calculate anything: decide your five row labels and your three column headings first, and be clear which row feeds the next month.

• (10)Assessling plant budgets historically: each line is last year's actual figure adjusted for expected changes. Its finance manager has found a service contract for equipment sold two years ago, and proposes moving the whole firm to zero-based budgeting from next year. Assess whether the plant should do so.

  How to earn the marks

  Appendix 6 defines Assess as requiring a coherent and logical chain of reasoning, well contextualised, with a balanced and wide-ranging assessment showing awareness of competing factors and leading to a supported judgement. Plan the judgement before you write the case, so the two sides you develop are the two the judgement actually turns on. The words "the whole firm" in the last sentence are doing work.

• (20)Evaluateng plant sells at $6 a case, with a variable cost of $3.60 and fixed costs of $36,000 a month. It breaks even at 15,000 cases and currently produces 20,000. Its owner discounts heavily on orders above a hundred cases and is considering a second production line. Evaluate the usefulness of break-even analysis to the owner in making that decision.

  How to earn the marks

  Appendix 6 defines Evaluate as requiring fully developed, coherent and logical chains of reasoning, a full awareness of the validity and significance of competing factors, and a perceptive conclusion that proposes a solution or recommendation. So the conclusion has to tell the owner what to DO, not only how useful the technique is. Two details in the stem are there to be used against the analysis — find them before you plan.