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Break-even

Students who have studied GCSE will have had an opportunity to study break-even. Break-even is an important concept to grasp. Too often students encounter problems when attempting exam questions. Typical mistakes include not placing the decimal point in the correct place and labelling the break-even point as £'s rather than units.

Break-even is an area of the specification that tends to be assessed regularly. For examiners it is an opportunity to stretch and challenge students. Some students would rather leave a break-even question blank rather than attempt it. This is a mistake. Failing to answer a question is a guarantee that students will not gain any marks. In contrast, a partially answered question will gain marks, particularly if workings out are shown.

It is a good idea for students to work through an example with the teacher. Students who struggle with numerical tasks may need additional help. It is worthwhile working out an appropriate scale for the break-even diagram before starting and providing those students who are having difficulty with a photocopied example of how to label the axes and what scale to use.

Students should already understand the difference between fixed costs and variable costs. They should also know how to calculate a firm's revenue. Start the lesson by recapping definitions of fixed and variable costs and get students to identify examples of fixed and variable costs.

At this point it is appropriate to explain the importance of calculating break-even for a new business.

When explaining how to draw the break-even diagram it is important to take your time. Students will work at very different speeds. If you provide the students with a workbook their notes will be well organised and the confident students can work at their own pace.

Get students to draw the diagram one step at a time, explaining why the fixed cost, variable costs and revenue cost lines look the way they do. Good questioning will encourage students to explain what the curves will look like before they are drawn.

Having drawn the break-even diagram, it is appropriate to get students into the habit of labelling the diagrams correctly and indicating the area of loss and area of profit on the diagram.

Many students drawing a break-even diagram will make an error. Lines may not be straight or may not be drawn from the right point. It is important to spend time with students explaining why their diagrams may not be correct.

At this stage it is appropriate to introduce the contribution method of calculating break-even. This can be used to reduce inaccuracy when drawing a break-even diagram. Use the figures from the example which students have already been drawn in order to calculate the break-even point. Having shown students how to calculate the break-even point, change the figures and get the students to substitute the new figures into the equation.

Once the students have the equation to calculate break-even then they can be asked to apply the technique to a number of different problems. Gradually they can be challenged to work out different pieces of information such as the break-even point, margin of safety, profit achieved and the effect of changing certain variables.

In a follow-up lesson it is a good idea to give students further examples to test their ability to apply knowledge to problem-solving contexts. It is important that students realise that it is not sufficient that they are able to calculate break-even they also need to be able to identify the strengths and limitations of the technique.

In an exam, students will be expected to use the contribution method because in a one and a quarter hour exam they will not have time to draw an appropriate diagram.

The following link is a good way of bringing a lesson to a close, since it provides a brief summary of how to draw a break-even diagram:

http://www.youtube.com/watch?v=TLOo2mY6FIw

A typical lesson plan for this type of activity is shown below.

Lesson Plan

COURSE: A - Level
SUBJECT: Business Studies

Aims

The aim of the lesson is to introduce students to the concept of break-even.

Students should gain an appreciation of the relationship between costs and revenue.

Students should understand the importance of setting prices in order to ensure that costs can be covered. Students will be encouraged to identify the value of determining break-even.

The lesson should provide students with an opportunity to demonstrate their ability to calculate the point at which costs are covered and demonstrate application of number.

Objectives

Students should know and understand the difference between fixed and variable costs.

Students will develop an understanding of the method of calculating break-even.

Students will have an opportunity to work through an example together. They will then learn how to calculate the break-even point using the contribution method.

Students will gain an insight into the benefits and limitations of calculating break-even.

MOTIVATOR: Specification requirements and need to address Key skill
PRIOR KNOWLEDGE: No prior knowledge
RESOURCES: Worksheets and powerpoint presentation. Video clip

Activity

Assessment

Student participation will be monitored by the lecturer. Student answers will be checked during class. Further tasks will be completed by students in order to check understanding.

Worksheet (127K)

Presentation (142K)

Resources created by Ian Etherington, November 2008.