Key Idea: In 5.5, IB wants you to understand break-even concepts, break-even charts, break-even calculations, and how changes in costs or price affect break-even. This topic is very calculation-heavy, but IB also expects you to interpret what the numbers mean.
🔢 Must-know formulas: **Break-even formula —** fixed costs divided by contribution per unit. **Target profit output —** (fixed costs + target profit) divided by contribution per unit. **Margin of safety —** actual sales minus break-even output.
📊 Must-know chart rules: **Break-even chart —** TR line starts at origin. **TC line —** starts at fixed cost level. **BEP —** where TR and TC cross. **Profit zone —** TR above TC.
[Diagram: break-even-chart]
📍 Reading the chart: **Below break-even —** loss. **At break-even —** no profit no loss. **Above break-even —** profit.
⚠️ Common traps: **Common mistake —** confusing contribution with profit. **Common mistake —** starting TC from zero. **Common mistake —** forgetting labels or scale.
In break-even questions, always show every step of your working. Even if the final answer is wrong, you can still get method marks.
When drawing a chart, label both axes, the total revenue line, the total cost line and the break-even point. If the question says to draw it to scale, that matters.
Example: A strong answer: If variable costs rise, contribution per unit falls, so the business must sell more units to break even. On a break-even chart, the total cost line becomes steeper.
Important: Common triggers: calculate break-even output, margin of safety or target profit, draw or interpret a break-even chart, explain how cost or price changes affect break-even, evaluate limitations of break-even analysis.
- Identify whether it is a formula question, chart question or interpretation question
- Write the correct formula first
- Substitute the numbers carefully
- Show the business meaning of the result
- If needed, explain how the change affects risk, profit or margin of safety