Break-even Cambridge IGCSE Business Studies (9–1) revision
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In plain words
How many must a business sell before it stops losing money? At some level of output the money coming in exactly equals the money going out. That is the break-even point: no profit, and no loss.
Sell one more and there is profit. Sell one fewer and there is a loss.
6 things to know
- Break-even output is the level of output at which total revenue equals total cost.
- Contribution per unit = selling price − variable cost per unit. It is what each sale contributes towards paying the fixed costs.
- Break-even output = fixed costs ÷ contribution per unit.
- Margin of safety = actual output − break-even output. It is how far sales can fall before the business makes a loss.
- On a break-even chart, the fixed cost line is horizontal, the total cost line starts at the fixed cost, and the revenue line starts at zero. Break-even is where total cost and revenue cross.
- Limitations: it assumes everything made is sold, and that the price and the costs stay the same at every level of output.
Worked example
A firm has fixed costs of $6000. It sells each unit for $10, and the variable cost of each is $6. Find the break-even output, and the margin of safety if it makes 2000 units.
- Contribution per unit = 10 − 6 = $4.
- Break-even output = fixed costs ÷ contribution = 6000 ÷ 4 = 1500 units.
- Margin of safety = 2000 − 1500 = 500 units.
Tips and tricks
- Divide the fixed costs by the contribution, not by the price. Using the price is the usual mistake.
- A higher price lowers the break-even output, because each sale contributes more. Higher costs raise it.
It lands in your notebook with its questions as flashcards.
Break-even: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
At the break-even point
There is no profit and no loss.
Fixed costs are $4000, price is $12 and variable cost per unit is $7. What is the break-even output?
Contribution = 12 − 7 = $5, and 4000 ÷ 5 = 800.
A firm's break-even output is 600 units and it sells 750. What is its margin of safety?
750 − 600 = 150.
What happens to the break-even output if the selling price is raised, with costs unchanged?
Each unit contributes more, so fewer are needed to cover the fixed costs.
Which is a limitation of break-even analysis?
In reality some goods may remain unsold.
Quiz
5 questions
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Worksheet
4 questions, 10 marks. Write your answers on paper, then check them.
Break-even
Cambridge IGCSE Business Studies (9–1) 0986 · 10 marks · papermunch.org
Name ______________________________ Date ______________
Define the break-even point.[2]
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The level of output at which total revenue equals total cost, so the business makes neither a profit nor a loss.
A business has fixed costs of $9000, a selling price of $15 and variable costs of $9 per unit. Calculate its break-even output.[3]
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Contribution = 15 − 9 = $6. Break-even output = 9000 ÷ 6 = 1500 units.
A business breaks even at 800 units and is producing 1100. Calculate its margin of safety.[2]
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300 units. 1100 − 800.
Explain two limitations of break-even analysis.[3]
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It assumes that all the output is sold, which may not happen. It assumes the selling price and the variable cost per unit stay the same at every level of output, when a business may have to cut its price to sell more.
Answers: Break-even
- 1. The level of output at which total revenue equals total cost, so the business makes neither a profit nor a loss.
- 2. Contribution = 15 − 9 = $6. Break-even output = 9000 ÷ 6 = 1500 units.
- 3. 300 units. 1100 − 800.
- 4. It assumes that all the output is sold, which may not happen. It assumes the selling price and the variable cost per unit stay the same at every level of output, when a business may have to cut its price to sell more.