The Concept of Break-even (Edexcel IGCSE Business)
Revision Note
Written by: Lisa Eades
Reviewed by: Steve Vorster
The Break-even Point
The break even point is the number of units a business must sell to reach the point where revenue is equal to total costs
At the break even point neither a loss nor a profit is made
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 to make informed decisions about pricing and production volumes
Calculation of the break even point requires three elements
Diagram with the Elements of a 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
E.g. rent, salaries and insurance
Variable costs are costs that vary with the level of production or sales
E.g. raw materials, direct labour costs, packaging and shipping costs
Revenue is the money earned from selling products/service and is calculated using the formula
In order to calculate the break even point the contribution per unit is needed
Contribution is the difference between the selling price per unit and the variable costs per unit
It is calculated using the formula
Examiner Tips and Tricks
In some cases you may need to work out what the selling price is in order to calculate contribution
The selling price per unit is calculated using the formula
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