Break-even

Break-even

• Break-even is the level of output at which total revenue equals total costs, so there is no profit and no loss.
• Contribution per unit = selling price − variable cost per unit. Break-even output = fixed costs ÷ contribution per unit.
• Example: price £10, variable cost £6 per unit and fixed costs £8,000. Contribution = £4, so break-even output = 8,000 ÷ 4 = 2,000 units. Break-even revenue = 2,000 × £10 = £20,000.

Break-even charts

• The fixed costs line is horizontal. The total costs line starts at the level of fixed costs and rises. The total revenue line starts at zero and rises.
• Break-even is where the total revenue and total costs lines cross. To the left there is a loss; to the right there is a profit.

Margin of safety

• Margin of safety = actual (or planned) output − break-even output. If the business in the example sells 2,500 units, its margin of safety is 500 units.

Changes and uses

• Break-even output falls if the price rises, or if fixed or variable costs fall. It rises if costs rise or the price falls.
• Break-even analysis helps with planning, setting prices and getting finance. But it assumes all output is sold at one price and that costs don't change.

Key terms

Break-even

The level of output where total revenue equals total costs.

Contribution

Selling price minus variable cost per unit.

Margin of safety

The amount by which output is above the break-even level.

Fixed costs

Costs that don't change with output.

Variable costs

Costs that change with output.

Total revenue

Selling price multiplied by quantity sold.

Break-even chart

A graph showing costs and revenue, and where they cross.