Breakeven Point (Edexcel GCSE Business)
Revision Note
Written by: Lisa Eades
Reviewed by: Steve Vorster
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 one of two formulas
Worked Example
Bravo Burgers has the following financial information for the month of May.
| May |
Raw materials for each burger | £2.10 |
Packaging for each burger | £0.20 |
Fixed costs | £1 ,730 |
Selling price for each burger | £4.95 |
(a) Using the information in the table, calculate the level of output required to break even in May. You are advised to show your workings. (2)
Step 1: Calculate the variable costs per burger
Variable cost per burger = raw materials + the packaging
Variable cost per burger = £2.10 + £0.20 = £2.30. (1 mark)
Step 2: Substitute the values into the breakeven formula
(1 mark)
Step 3: Round to the nearest unit
653 burgers need to be sold to break even in May (2 marks for a correct answer)
Examiner Tip
Always round up the break even point to the nearest whole unit.
Interpreting Break Even Diagrams
A break even chart is a visual representation of the break even point
The break even chart for A2B Limited shows that at 324 units the total revenue = the total costs
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 break even point
The break even 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 break even 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
Examiner Tip
When calculating the break even point write down the break even formula first and then find the figures you need to fill in the data required.
This allows you to check that you have everything you need for the calculation - and you will be able to identify very quickly whether you need to carry out further calculations such as total fixed costs.
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 break even 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
Worked Example
Figure 1 shows the weekly break-even diagram for the Yorkshire Rare Breed Sausage Company.
Figure 1: Output, Costs & Revenues of the Yorkshire Rare Breed Sausage Company
Using Figure 1 above, calculate the weekly margin of safety. Show your workings and the formula used. (3)
Step 1: Write the formula down
(1 mark)
Step 2: Read from the chart and substitute values into the formula
(1 mark for any correct working; 3 marks for the correct answer)
Examiner Tip
Use a ruler to help you read break even charts accurately.
Last updated:
You've read 0 of your 10 free revision notes
Unlock more, it's free!
Did this page help you?