IGCSE Business: break-even analysis is one of the most searched topics because it appears in almost every Business Studies paper. You need to calculate break-even (fixed costs ÷ contribution per unit), draw the break-even chart (fixed cost line, total cost line, revenue line; break-even where revenue = total cost), and interpret margin of safety and the effect of changes.

Break-Even Formula and Key Terms

• Break-even (units) = Fixed costs ÷ (Selling price per unit − Variable cost per unit). Denominator = contribution per unit.
• Break-even (revenue) = Break-even units × Selling price per unit.
• Margin of safety = Actual (or budgeted) output − Break-even output; or in revenue terms.

Drawing the Chart

• Axes: Output (units) on horizontal; Cost/Revenue (£ or $) on vertical.
• Fixed cost line: Horizontal (same at all output levels).
• Total cost line: Starts at fixed cost at zero output; slopes up (fixed + variable).
• Revenue line: Starts at origin; slopes up (price × quantity).
• Break-even point: Where revenue line crosses total cost line.
• Margin of safety: Distance from break-even output to actual output.

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Worked Example and Common Mistakes

Example: Fixed costs = £2000, selling price = £10 per unit, variable cost = £6 per unit. Break-even = 2000 ÷ (10 − 6) = 500 units. Break-even revenue = 500 × 10 = £5000. Common mistakes: Wrong formula (e.g. dividing by selling price only); misreading fixed and variable costs; drawing the chart with wrong axes or slope; margin of safety shown incorrectly. Label the break-even point and margin of safety clearly on the chart.

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