Breakeven Point (Edexcel GCSE Business) : Revision Note

The breakeven point

• The breakeven point is a useful metric to help a business understand how many units it needs to sell before it starts making a profit

  • The breakeven point is the number of units that need to be sold for total costs to equal the sales revenue

• The breakeven point can be calculated using the formula

Interpreting breakeven diagrams

• A breakeven chart is a visual representation of the break even point

Diagram analysis 

• Fixed costs do not change as output increases

  • A2B's fixed costs are £8,000 and these do not change whether the business produces 0 units or 500 units

• Total costs are made up of fixed and variable costs

  • At 0 units of output, they are made up exclusively of fixed costs

  • At 500 units the total variable costs equate to £11,800

  • This line slopes upwards because total variable costs increase as output increases

• The revenue line also slopes upwards

  • At 0 units of output, the revenue is £0

  • At 500 units the total revenue equates to £11,800

  • Revenue will increase with the output

  • The line will slope more steeply than the total costs and will cross the total costs line at some point

• The point at which the total costs and the revenue lines cross is the breakeven point

  • The breakeven level of output for A2B is 324 units

• The margin of safety can be identified as the difference on the x-axis between the actual level of output (in this case 450 units) and the breakeven point
  

• The profit made at a specific level of output can be identified as the space between the revenue and total costs lines

  • In this instance, the profit made at 450 units of output is £14,400 - £11,250 = £3,150

The margin of safety

• The margin of safety provides useful information to a firm on how many sales they could lose before they start making a loss

  • The margin of safety is the amount by which the number of units sold is greater than the breakeven point

  • The margin of safety can be calculated using the following formula

• Businesses prefer their margin of safety to be as large as possible

  • This means that if demand for their products drops unexpectedly, the business will continue to make a profit