⚖️ What is break-even?
Big Idea: The break-even point is where a business makes exactly enough revenue to cover all its costs — no profit, no loss. It's the magic number every business needs to know! 🎯
Why does break-even matter?
- Tells a business how many units it must sell to avoid a loss
- Helps with planning — how much do we need to produce?
- Useful for new businesses writing a business plan
- Helps evaluate the impact of price or cost changes
At break-even: Total Revenue = Total Costs. Below it → loss. Above it → profit! 📊
💰 Fixed and variable costs
To understand break-even, you first need to know the two types of costs.
Fixed costs (FC)
Costs that stay the same no matter how much the business produces.
- Rent, insurance, salaries, loan repayments
- Must be paid even if output is zero
- On a graph: a horizontal line
Variable costs (VC)
Costs that change with output — the more you produce, the higher they are.
- Raw materials, packaging, direct labour (per unit), electricity for machines
- Zero output = zero variable costs
- On a graph: a line that slopes upwards from the origin
Total costs (TC) = fixed costs + variable costs. On a break-even chart, the TC line starts at the level of fixed costs and slopes upwards.
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📈 Revenue and contribution
Total revenue (TR)
The total income from selling products.
- Total revenue = selling price × quantity sold
- On a graph: a straight line from the origin that slopes upwards
- The steeper the line, the higher the price
Contribution
Contribution is the amount each unit sold contributes towards paying off fixed costs.
- Contribution per unit = selling price − variable cost per unit
- Total contribution = contribution per unit × number of units sold
- Once total contribution covers all fixed costs → you've hit break-even!
Example: Selling price = $10, variable cost = $6. Contribution per unit = $4. If fixed costs are $2000, you need to sell 500 units to break even ($2000 ÷ $4 = 500).
Contribution is the KEY building block for all break-even calculations. Master it and the rest is easy! 🧱
📖 Key break-even terms
Make sure you know all of these terms — they come up in calculations and short-answer questions.
- Break-even point (BEP) — where total revenue = total costs (zero profit, zero loss)
- Break-even output — the NUMBER of units at the break-even point
- Margin of safety — the difference between actual sales and break-even sales (your safety cushion)
- Contribution per unit — selling price minus variable cost per unit
- Profit — total revenue minus total costs (only positive above break-even)
- Loss — when total costs exceed total revenue (below break-even)
Don't confuse contribution with profit! Contribution = price − variable cost per unit. Profit = total revenue − ALL costs (fixed + variable).