IB Business Management – Finance and Accounts

3.3A: Break-Even Analysis: Activity

3.3 BREAK-EVEN ANALYSIS: ACTIVITY A

Read the case study information below and answer the questions that follow.

THE VAN BOHEEMEN

The van Boheemen is a new
burger joint in the central
business district in Wellington,
New Zealand. The burger joint
specialises in a range of value-
for-money burgers made from
Ruby van Boheemen’s own
secret recipes. Market testing
has generated a lot of
favorable feedback. The
takeaway shop operates out
of a ‘hole in the wall’ location
and caters solely to the lunch
time crowd. Opening hours
are
only 11:30 am to 2:00 pm. Rent and labour costs are thus kept to a bare minimum allowing
Ruby to price her burgers at a very competitive $2 across her small product range. The fixed
costs for the restaurant are $500 a day, and variable costs are just $1 per burger.
Before Ruby opened her store she sat down and did a range of cost and revenue
calculations; she would now like you to double check her calculations. She has the break-
even level of production as being at 500 burgers a day.
 Quantity Fixed cost Variable Total cost Total Profit/
sold ($) cost ($) revenue (Loss
($) ) ($)
500 0 500 0 (500)
0
500 100 600 200 -400
100
500 200 700 400 -300
200
500 300 800 600 -200
300
500 400 900 800 -100
400
500 500 1000 1000 0
500
500 600 1100 1200 100
600
500 700 1200 1400 200
700

QUESTIONS: 18 MARKS, 20 MINUTES

1. Calculate all missing values in the table to confirm that the break-even level of output is
indeed 500 burgers. [6 marks]

2. Construct a fully-labelled break-even graph from the information given, to again confirm
the break-even level of output. [8 marks]

3. Identify on the break-even graph the margin of safety and profit at The van Boheemen’s
full operating capacity – 700 burgers a day. [4 marks]

Ms.Heba Ibrahim
Business Teacher - IBDP/IGCSE
AMA International School Bahrain
hkafrawy@amais.edu.bh
 Break-Even Graph for Boheemen's
12

10

8
TC, TR, FC ($)

Fixed cost ($)

6 Total revenue
Total cost ($)
4

0
0 1 2 3 4 5 6 7 8 9 10
Output ($)

The break-even point is where the Total costs = Total revenue in the graph (where the lines meet) which is
at the point (0, 1000)

Q3) from the break even graph we can conclude the margin of safety, and since boheemen’s made
200$ in profit by selling 700 burgers, the margin of safety is 200 units (above the break even point)