The Concept of Break-even (Edexcel IGCSE Business)

Revision Note

Lisa Eades

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

Diagram with the Three main Components 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

Revenue space equals space Quantity space Sold space cross times space Selling space Price

 

  • 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

Contribution space equals space Selling space Price space per space unit space minus space Variable space Cost space per space unit

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

Selling space Price space per space unit space equals space Revenue space divided by space Number space of space Units

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Lisa Eades

Author: Lisa Eades

Expertise: Business Content Creator

Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.