The Concept of Break-even (Edexcel IGCSE Business)

• 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