📊 How cost changes affect break-even
Big Idea: When costs or prices change, the break-even point moves. Understanding HOW it moves is a key exam skill! 🔄
If fixed costs increase
- TC line shifts UPWARD (parallel, same gradient)
- Break-even output INCREASES — need to sell more to cover higher costs
- Margin of safety DECREASES
- Example: rent goes up → TC line moves up → BEP shifts right
If variable costs increase
- TC line becomes STEEPER (starts at same point, rises faster)
- Contribution per unit falls → break-even output INCREASES
- Example: raw material prices rise → each unit costs more → TC line steepens
Exam favourite: Explain how a change in fixed OR variable costs would affect the TC line on a break-even chart. Fixed costs → shift up/down. Variable costs → change gradient.
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💲 How price changes affect break-even
If selling price increases
- TR line becomes STEEPER (more revenue per unit)
- Contribution per unit rises → break-even output DECREASES
- Margin of safety INCREASES
- But: higher prices might mean fewer customers!
If selling price decreases
- TR line becomes LESS STEEP (less revenue per unit)
- Contribution per unit falls → break-even output INCREASES
- Margin of safety DECREASES
- But: lower prices might attract more customers!
Price up → TR steeper → BEP lower. Price down → TR flatter → BEP higher. Always think about BOTH the numbers AND the impact on demand! 🤔
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⚠️ Limitations of break-even analysis
Break-even is a useful tool, but it has some important limitations.
- Assumes all output is sold — in reality, not everything sells
- Assumes costs are purely fixed or variable — some are semi-variable
- Assumes selling price stays the same — businesses often use discounts
- Only considers one product — most businesses sell multiple products
- Static model — doesn't account for changes over time
Exam tip: In longer questions, mentioning limitations shows critical thinking and can push your answer into the top mark band.