| Using Break-Even Analysis to Make Decisions: • Contribution and contribution per unit • Calculation of break-even output • Construction of break-even charts • Analysing the effects of changing variables on break-even charts |
The break even point is where Total Cost (TC) exactly equals Total Revenue (TR).
Break even formula:
Total Fixed cost (£) ÷
Total Fixed cost (£) ÷
Contribution per unit (£)
The result of this calculation shows the number of units that must be produced and sold to cover all the costs of the business.
The result of this calculation shows the number of units that must be produced and sold to cover all the costs of the business.
There is therefore no profit and there is no loss.
Reaching the break even number of sales is usually an objective for a small business start-up.
On Sunday 9th February 2020 this business failed to reach its break even number of sales.
Reaching the break even number of sales is usually an objective for a small business start-up.
On Sunday 9th February 2020 this business failed to reach its break even number of sales.
Break even charts are useful for small business start ups because they can allow an entrepreneur to see what would happen if one of the variables changed.
In the exam you might be asked to draw a new line to show how the break even point will change if, for example, the price charged changed.
You might also be asked to calculate the break even number of units.
This means the number of items a business must sell to cover its costs. (Remember the break even point is where TR=TC)
This video explains the calculation.
You will have to remember the formula in the exam so take careful note.
Margin of safety:
The difference between the actual level of output and the break even level of output.
Look at the box at the top of this page.
Are you confident that you could answer an exam question on one of these topics?
Advantages of using break even:
It allows the entrepreneur to work out the profit or loss at each level of output.
The impact of a change in one of the variables can be identified.
Disadvantages:
Only really useful for a business that produces a single product.
Inaccurate information will make the results of the calculation invalid.
Break even question (from a different exam board) here.
More on break even here.
