Break-even (AQA GCSE Business)
Revision Note
The Concept of Break-even
Break-even analysis is a financial tool used to determine the number of units a business must sell to reach a point where its revenue equals its expenses (no profit nor loss)
It helps businesses understand the minimum level of sales or output they need to achieve in order to cover all costs
This helps business managers make informed decisions about pricing and production volumes
Diagram: components of break-even analysis
Variable costs, fixed costs and sales revenue are all used in calculating the break-even point
Fixed costs are costs that do not change regardless of the level of production or sales
They remain the same at every level of output
E.g. rent, salaries and insurance
Variable costs are costs that vary with the level of production or sales
They increase in direct proportion with the level of output
E.g. raw materials, direct labour costs, packaging and shipping costs
Total costs are the sum of fixed costs and total variable costs at a particular level of output, calculated using the formula
Revenue is the money gained from selling products, calculated using the formula
Examiner Tip
You will not be expected to use the break even formula in your exam, but you may be asked to calculate revenue, costs or profit using given figures.
The Value of Break-even
Break-even analysis provides valuable insights into the financial viability and performance of a business
It is particularly useful for communicating with stakeholders, including investors or lenders
It demonstrates the financial viability of the business and gives them an insight into the potential returns they can expect on investment
The Benefits of Break-even Analysis
Benefit | Explanation |
---|---|
Profitability assessment |
|
Cost control |
|
Pricing decisions |
|
Financial planning |
|
Performance monitoring |
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Decision making |
|
However, in common with other quantitative analysis tools, break-even analysis has some limitations
Diagram: limitations of break-even analysis
Break even analysis is based on forecasts, makes assumptions such as all output is sold and has limited use when business sell several products
Examiner Tip
In Paper 2, some 'explain' questions are worth 4 marks, rather than 2 marks. In these questions, you must ensure that you use the business context to support your answer.
Example
Explain one reason why PiSkate Ltd should calculate the number of skateboards needed to break even. [4]
PiSkate can identify how many skateboards it needs to sell in order to cover all costs and start to make a profit [1]. It is currently able to produce 4,000 boards [1] and by calculating break-even it can see whether it can generate enough sales revenue from these to cover the cost of production [1] and, if so, how much profit they would make to reinvest in the business for its planned expansion [1].
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