Break-even (AQA GCSE Business)

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

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

• 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