Why is "Giving the margin of safety in dollars when units are required (or vice-versa), or omitting the unit altogether." a common mistake in Break-even analysis?

Why it happens: Students forget that margin of safety is defined in units and convert to $ automatically, or lose track of what the question asked for. How to avoid it: Margin of safety = actual output − break-even output, in UNITS. Only multiply by selling price to get $ if the question explicitly asks for the margin of safety in revenue. Always state the unit. Source: IB Business Management examiner reports — margin-of-safety questions

Why is "Treating break-even's assumptions as realistic and recommending a decision purely because the firm 'exceeds break-even'." a common mistake in Break-even analysis?

Why it happens: Break-even produces a clean number that looks authoritative, so students trust it and skip evaluation. How to avoid it: In AO3 answers, always question the assumptions — linear costs/revenue, single product, all output sold, constant prices/costs, and an unproven sales forecast — and treat break-even as decision-SUPPORT, not the decision. Source: IB Business Management examiner reports — weak AO3 evaluation

Why is "Mislabelling the break-even chart — drawing the total-cost line from the origin, or the total-revenue line from the fixed-cost intercept." a common mistake in Break-even analysis?

Why it happens: Students confuse which line starts where and draw all lines from the origin. How to avoid it: TR starts at the ORIGIN (0 units = $0 revenue); TC starts on the y-axis at the level of FIXED COSTS (0 units still incurs fixed costs); the FC line is horizontal. Label all three lines plus the break-even point and margin of safety. Source: IB Business Management examiner reports — 'construct' questions

Why is "Rounding a decimal break-even quantity down (or to the nearest whole number) instead of UP." a common mistake in Break-even analysis?

Why it happens: Students apply ordinary rounding rules and round 13,333.3 to 13,333. How to avoid it: You cannot sell a fraction of a unit, and selling fewer than the exact figure leaves a loss — so always round the break-even quantity UP to the next whole unit (13,333.3 → 13,334). Source: IB Business Management examiner reports — calculation precision

Why is "Stopping at total contribution and calling it profit (forgetting to subtract fixed costs)." a common mistake in Break-even analysis?

Why it happens: Contribution and profit both feel like 'the money made', so students report the contribution figure as the profit. How to avoid it: Profit = total contribution − fixed costs. Contribution only becomes profit AFTER fixed costs are covered; always complete the final subtraction. Source: IB Business Management examiner reports — profit calculation error

IB DP Business Management (147712)

Break-even analysis

Q: Why is "Using total variable cost instead of variable cost PER UNIT when calculating contribution." a common mistake in Break-even analysis?

Why it happens: Data is sometimes given as a total (e.g. 'variable costs of $60,000'), and students subtract it straight from the selling price without first finding the per-unit figure. How to avoid it: Contribution per unit = selling price − variable cost of ONE unit. If only a total variable cost is given, divide it by the number of units first to get the per-unit cost. Source: IB Business Management examiner reports — recurring calculation error

0% Complete

Detailed Study Notes

Detailed notes on Operations management for IB DP Business Management, covering key concepts, explanations, examples, and exam-focused revision points.

Break-even analysis — contribution, the break-even quantity, break-even charts and the margin of safety

Break-even analysis tells a business the level of output at which total revenue exactly equals total costs — the point where it makes neither a profit nor a loss. This subtopic teaches you to calculate contribution per unit, find the break-even quantity with the formula, construct and interpret a break-even chart (fixed-cost, total-cost and total-revenue lines, the break-even point and the margin of safety), work out the effect of a change in price, variable cost or fixed cost, and — the top-band skill — evaluate a decision using break-even while acknowledging the model's assumptions and limitations.

At a glance

Contribution per unit = selling price − variable cost per unit. It is what each unit 'contributes' first to fixed costs and then to profit.
Break-even quantity = fixed costs ÷ contribution per unit — the output where total revenue = total costs (no profit, no loss).
A break-even chart plots the fixed-cost line, total-cost line and total-revenue line; they cross at the break-even point.
Margin of safety = actual (or budgeted) output − break-even output. It shows how far sales can fall before a loss — measured in UNITS (or $ if stated).
Profit at a given output = total contribution − fixed costs = (contribution per unit × units) − fixed costs.
A higher price or lower variable cost RAISES contribution and LOWERS the break-even quantity; higher fixed or variable costs RAISE it.
The model assumes linear costs/revenues, a single product, that everything produced is sold, and constant prices and costs — treat these as limitations, not facts.
Command terms: Define/Calculate (AO1, 2m), Calculate + interpret / Construct a chart (AO2, 4–6m), Recommend/Evaluate (AO3, ~10m). Paper 1 and Paper 2 are heavily quantitative.

What you’ll learn

Mapped to the IB DP Business Management subject guide (2024 onwards (first assessment May 2024)).

Calculate contribution per unit and total contribution.
Calculate the break-even quantity (break-even point) using the formula method.
Construct and interpret a break-even chart, identifying the fixed-cost line, total-cost line, total-revenue line, break-even point, margin of safety and the profit/loss regions.
Calculate the margin of safety and the profit or loss at a given level of output.
Calculate the target level of output required to reach a target profit.
Analyse the effect of changes in price, variable cost or fixed cost on the break-even point.
Evaluate the uses and limitations of break-even analysis as a decision-making tool, integrating the numbers with judgement about its assumptions.

Contribution — the engine of break-even analysis

Contribution per unit is selling price minus variable cost per unit. Each unit's contribution first pays off fixed costs; once fixed costs are covered, every further unit's contribution becomes profit.

Everything in break-even analysis is built on contribution. Contribution per unit is the amount each unit sold contributes towards covering fixed costs and — once those are covered — towards profit.

Contribution per unit = selling price − variable cost per unit

The word variable cost per unit matters. You subtract the variable cost of one unit (the materials, direct labour and other costs that vary with each unit made) — not the firm's total variable cost. Getting this wrong is the single most common examiner-flagged error in the topic.

Total contribution scales this up to the whole output:

Total contribution = contribution per unit × number of units sold

Contribution is not profit. Contribution first has to pay off the fixed costs (rent, salaries, insurance — costs that do not change with output in the short run). Only after total contribution exceeds fixed costs does the business make a profit:

Profit = total contribution − fixed costs

Example. A firm sells a desk lamp for $10**; the variable cost per lamp is **$ 6. Contribution per unit = 10 − 6 = $4**. If it sells 15,000 lamps, total contribution = 4 × 15,000 = **$ 60,000. With fixed costs of $40,000**, profit = 60,000 − 40,000 = **$ 20,000.

Contribution per unit = selling price − variable cost per unit (per ONE unit).
Total contribution = contribution per unit × units sold.
Contribution pays fixed costs first; the surplus is profit.
Profit = total contribution − fixed costs.

The break-even quantity — the formula method

The break-even quantity is fixed costs divided by contribution per unit. At that output total revenue equals total costs, so profit is zero. Always round UP to a whole unit.

The break-even point (BEP) is the level of output at which total revenue equals total costs, so the business makes neither a profit nor a loss. The output that achieves this is the break-even quantity (BEQ).

Because every unit's contribution chips away at fixed costs, you reach break-even once enough units have been sold for total contribution to exactly equal fixed costs. That gives the formula:

Break-even quantity = fixed costs ÷ contribution per unit

Example. Fixed costs $40,000, contribution per unit$ 4 (price $10 − variable cost$ 6). Break-even quantity = 40,000 ÷ 4 = 10,000 units. Selling 10,000 lamps produces revenue of $100,000 and total costs of$ 100,000 (fixed $40,000 + variable$ 60,000) — exactly break-even.

Rounding. Break-even is often a decimal (e.g. 13,333.3 units). You cannot half-sell a unit, and selling fewer than the exact figure leaves a small loss — so round UP to the next whole unit. Rounding down understates the output actually needed to break even.

You can also express break-even in sales revenue: break-even revenue = break-even quantity × selling price. The IB primarily examines the quantity (units) via the formula above and via the chart below.

Break-even point: total revenue = total costs → zero profit/loss.
Break-even quantity = fixed costs ÷ contribution per unit.
Round the break-even quantity UP to the next whole unit.
Break-even revenue = break-even quantity × selling price.

See the full worked example for break-even analysis →

The break-even chart — construct and interpret

A break-even chart plots output on the x-axis and costs/revenue on the y-axis. The horizontal fixed-cost line, the total-cost line rising from the fixed-cost intercept, and the total-revenue line rising from the origin cross at the break-even point.

A break-even chart shows revenue and costs against output on one graph. The IB command term Construct asks you to draw and fully label it. Learn the three lines and where each one starts:

x-axis = output/quantity (units); y-axis = costs and revenue ($).
Fixed-cost (FC) line — a horizontal line: fixed costs stay the same at every output.
Total-cost (TC) line — starts on the y-axis at the level of fixed costs (output 0 still incurs fixed costs) and rises with each unit's variable cost. TC does NOT start at the origin.
Total-revenue (TR) line — starts at the origin (zero units = zero revenue) and rises more steeply than TC (as long as price > variable cost per unit).
Break-even point — where the TR line crosses the TC line. Read straight down to the x-axis for the break-even quantity.
Margin of safety — the horizontal distance on the x-axis between the break-even output and the actual/budgeted output.
Loss region (left of the break-even point, where TC is above TR) and profit region (right of it, where TR is above TC).

Reading the chart. The vertical gap between the TR and TC lines at any output is the profit (if TR is on top) or the loss (if TC is on top). At the break-even quantity the gap is zero. To the right, the widening green gap is profit; to the left, the red gap is loss.

x-axis = output; y-axis = costs/revenue ($).
FC line is horizontal; TC line starts at the FC intercept; TR line starts at the origin.
Break-even point = where TR crosses TC; read down for the break-even quantity.
Vertical gap between TR and TC = profit (TR on top) or loss (TC on top).

Margin of safety, profit and target profit

The margin of safety is how far actual output exceeds break-even output. Profit at any output is total contribution minus fixed costs. To hit a target profit, add it to fixed costs before dividing by contribution.

Margin of safety measures how much sales can fall before the business slips into a loss — a cushion against a downturn:

Margin of safety = actual (or budgeted) output − break-even output

It is measured in units unless the question specifically asks for it in $ (then multiply the unit margin of safety by the selling price). A larger margin of safety means a safer position; a firm operating just above break-even is vulnerable.

Example. Break-even = 10,000 units; the firm actually sells 15,000. Margin of safety = 15,000 − 10,000 = 5,000 units — sales could fall by up to 5,000 units before a loss is made.

Profit at a given output is quickest via contribution:

Profit = (contribution per unit × units) − fixed costs

At 15,000 units: profit = (4 × 15,000) − 40,000 = 60,000 − 40,000 = $20,000.

Target profit output. To find the output needed to reach a desired profit, treat the target profit as an extra amount that contribution must also cover on top of fixed costs:

Target-profit output = (fixed costs + target profit) ÷ contribution per unit

Example. To make a target profit of $16,000: (40,000 + 16,000) ÷ 4 = 56,000 ÷ 4 = 14,000 units.

Margin of safety = actual output − break-even output (in UNITS unless $ is asked).
Profit = total contribution − fixed costs.
Target-profit output = (fixed costs + target profit) ÷ contribution per unit.
A small margin of safety signals a risky, low-cushion position.

See the full worked example for break-even analysis →

The effect of changes in price, variable cost and fixed cost

Anything that raises contribution per unit (a higher price or lower variable cost) lowers the break-even quantity; anything that raises fixed costs or variable cost per unit raises it. Recalculate to prove the direction and size of the change.

Exam questions frequently ask how a change affects the break-even point. The safe method is always to recalculate — work out the new contribution and/or fixed costs and re-apply the formula. The direction of every change follows from the formula break-even = fixed costs ÷ contribution per unit:

Change	Effect on contribution	Effect on break-even quantity
Selling price rises	Contribution up	Break-even falls
Selling price falls	Contribution down	Break-even rises
Variable cost per unit rises	Contribution down	Break-even rises
Variable cost per unit falls	Contribution up	Break-even falls
Fixed costs rise	Unchanged	Break-even rises
Fixed costs fall	Unchanged	Break-even falls

Worked change. Base case: price $10, variable cost$ 6, fixed costs $40,000 → contribution$ 4 → break-even 10,000 units.

**Supplier raises the variable cost to $7.** New contribution = 10 − 7 =$ 3. New break-even = 40,000 ÷ 3 = 13,333.3 → 13,334 units (up by ~3,334).
**The firm raises the price to $12 instead.** New contribution = 12 − 6 =$ 6. New break-even = 40,000 ÷ 6 = 6,666.7 → 6,667 units (down by ~3,333) — though a higher price may cut the quantity demanded.
**Rent rises, lifting fixed costs to $48,000.** Contribution unchanged at$ 4. New break-even = 48,000 ÷ 4 = 12,000 units (up by 2,000).

On the chart, a rise in fixed costs shifts the FC and TC lines upward (parallel), moving the break-even point right; a price rise makes the TR line steeper, moving the break-even point left.

Higher price or lower variable cost → higher contribution → lower break-even.
Higher variable cost per unit → lower contribution → higher break-even.
Higher fixed costs → higher break-even (contribution unchanged).
Always recalculate to show the size of the change, not just the direction.

See the full worked example for break-even analysis →

Uses and limitations of break-even analysis

Break-even is a quick, visual planning and 'what-if' tool, but it rests on simplifying assumptions — linear costs and revenues, a single product, all output sold, and constant prices and costs — that rarely hold in reality.

Uses (why businesses value it):

Planning & target setting — shows the minimum output that must be sold to avoid a loss, useful for a start-up or a new product.
Decision-making / 'what-if' analysis — quickly models the effect of a price change, a cost increase or a new fixed cost (e.g. moving premises).
Setting prices and output — helps judge whether a price will let the firm break even at a realistic sales volume.
Supporting finance applications — banks and investors see a clear, visual picture of viability.
Assessing risk via the margin of safety — flags how exposed the firm is to a fall in sales.

Limitations (the assumptions that weaken it):

Linearity — it assumes costs and revenue rise in straight lines. In reality, bulk-buying discounts lower variable cost at high output, and overtime raises it; discounts change revenue per unit.
Single product — the basic model assumes one product with one price and one variable cost; most firms sell a range.
All output is sold — it assumes production = sales, ignoring unsold stock.
Constant prices and costs — it is a snapshot; prices, wages and material costs change over time.
Static / short-term — it ignores the dynamic market (competition, demand shifts) and is only as reliable as its forecast data (garbage in, garbage out).

The examiner-rewarded stance: break-even is a useful first-pass planning tool, but its assumptions mean it should inform — not dictate — a decision, and it must be combined with qualitative judgement and up-to-date data.

Uses: planning, target setting, 'what-if' analysis, pricing, risk (margin of safety), supporting finance bids.
Limitations: linear costs/revenue, single product, all output sold, constant prices/costs, static snapshot.
Reliability depends entirely on the accuracy of the forecast data.
Top answers treat break-even as decision-SUPPORT, not the decision itself.

Quick recap

Contribution per unit = selling price − variable cost per unit (one unit, not total).
Break-even quantity = fixed costs ÷ contribution per unit; total revenue = total costs there.
On a break-even chart: FC line horizontal, TC line from the FC intercept, TR line from the origin; they cross at the break-even point.
Margin of safety = actual output − break-even output (units unless $ is asked).
Profit = total contribution − fixed costs; target-profit output = (fixed costs + target profit) ÷ contribution per unit.
Higher contribution (price up / variable cost down) lowers break-even; higher fixed costs raise it.
Break-even is a quick planning tool but assumes linearity, a single product, all output sold and constant prices/costs — a decision-support tool, not the decision.

Memorise this

Verbatim phrases, formulae and definitions IB DP mark schemes credit (key for AO1 knowledge marks on Paper 1).

Contribution per unit = selling price − variable cost per unit
Total contribution = contribution per unit × units sold
Break-even quantity = fixed costs ÷ contribution per unit
Profit = total contribution − fixed costs
Margin of safety (units) = actual output − break-even output
Target-profit output = (fixed costs + target profit) ÷ contribution per unit

How it’s examined

Break-even is one of the most reliable calculation topics at both SL and HL. Paper 1 (pre-seen case study) and Paper 2 (unseen, heavily quantitative) both use it. Expect: AO1 — Define contribution/margin of safety or Calculate a single figure (2 marks); AO2 — Calculate the break-even quantity, margin of safety or profit AND interpret it, or Construct a fully labelled break-even chart (4–6 marks); AO3 — Recommend/Evaluate a decision (a price cut, a move to higher fixed costs, launching a product) using break-even, integrating the numbers with judgement about the model's assumptions and limitations (~10 marks). Always show your working line by line, round the break-even quantity UP, state the units, and — for the chart — label all three lines, the break-even point and the margin of safety.

Sources: IB Diploma Programme Business Management Guide (first teaching 2022, first assessment 2024). Last reviewed 2026-07-24.

Take this whole topic with you

Step-by-step worked examples — Break-even analysis

Step-by-step solutions to past-paper-style questions on break-even analysis, written exactly the way a tutor would explain them at the board.

1Calculate the contribution per unit
Getting started• IB Business Management Paper 1/2 style (AO2)• contribution, AO2
Question
BrightDesk sells a desk lamp for $10. The variable cost of making one lamp is$ 6. Calculate the contribution per unit.
Step-by-step solution
1. Step 1
  Use contribution per unit = selling price − variable cost PER UNIT. Both figures here are already 'per unit'.
  $Contribution per unit = 10 − 6$
2. Step 2
  Subtract to find the contribution each lamp makes.
  $= $4 per unit$
Answer
Contribution per unit = $4.
Examiner tip
Full marks need the working (10 − 6) and the correct unit ( $per unit). Using total variable cost instead of the$ 6 per-unit figure is the classic error.
2Calculate the break-even quantity
Getting started• IB Business Management Paper 2 style (AO2)• break-even quantity, AO2
Question
BrightDesk has fixed costs of $40,000. Its lamps sell for$ 10 with a variable cost of $6 per lamp. Calculate the break-even quantity.
Step-by-step solution
1. Step 1
  First find contribution per unit.
  $Contribution per unit = 10 - 6 = $4$
2. Step 2
  Break-even quantity = fixed costs ÷ contribution per unit.
  $Break-even quantity = 40,000 ÷ 4$
3. Step 3
  Divide to find the output that gives zero profit/loss.
  $= 10,000 units$
Answer
Break-even quantity = 10,000 units.
Examiner tip
Show contribution first, then the division. State the answer in UNITS. At 10,000 units revenue ( $100,000) exactly equals total costs ($ 40,000 fixed + $60,000 variable).
3Calculate the margin of safety
Getting started• IB Business Management Paper 1/2 style (AO2)• margin of safety, AO2
Question
BrightDesk's break-even quantity is 10,000 units. It currently sells 15,000 lamps. Calculate the margin of safety.
Step-by-step solution
1. Step 1
  Margin of safety = actual output − break-even output. Both are in units.
  $Margin of safety = 15,000 − 10,000$
2. Step 2
  Subtract to find how far sales can fall before a loss is made.
  $= 5,000 units$
Answer
Margin of safety = 5,000 units — sales could fall by up to 5,000 lamps before BrightDesk makes a loss.
Examiner tip
Give the answer in UNITS unless the question asks for $(then × selling price = 5,000 × 10 =$ 50,000). A one-line interpretation lifts the response into full AO2 credit.
4Calculate the profit at a given level of output
Building confidence• IB Business Management Paper 2 style (AO2)• profit, contribution, AO2
Question
BrightDesk (price $10, variable cost$ 6, fixed costs $40,000) sells 15,000 lamps. Calculate its profit.
Step-by-step solution
1. Step 1
  Find contribution per unit.
  $Contribution per unit = 10 - 6 = $4$
2. Step 2
  Total contribution = contribution per unit × units sold.
  $Total contribution = 4 \times 15,000 = $60,000$
3. Step 3
  Profit = total contribution − fixed costs.
  $Profit = 60,000 - 40,000 = $20,000$
Answer
Profit = $20,000.
Examiner tip
Do NOT stop at total contribution ($60,000) and call it profit — you must subtract fixed costs. Contribution is not profit until fixed costs are covered.
5Calculate the output needed for a target profit
Building confidence• IB Business Management Paper 2 style (AO2)• target profit, AO2
Question
BrightDesk (contribution $4 per unit, fixed costs$ 40,000) wants to make a target profit of $16,000. Calculate the output it must sell.
Step-by-step solution
1. Step 1
  Contribution must now cover fixed costs AND the target profit, so add them together.
  $Fixed costs + target profit = 40,000 + 16,000 = 56,000$
2. Step 2
  Target-profit output = (fixed costs + target profit) ÷ contribution per unit.
  $Target-profit output = 56,000 ÷ 4$
3. Step 3
  Divide to find the required output.
  $= 14,000 units$
Answer
Required output = 14,000 units.
Examiner tip
Add the target profit to fixed costs in the numerator — a common slip is dividing the target profit alone by contribution and forgetting fixed costs.
6Calculate margin of safety and profit together
Building confidence• IB Business Management Paper 2 style (AO2)• break-even quantity, margin of safety, profit, AO2
Question
A cafe sells 8,000 meals a month at $12 each. The variable cost per meal is$ 7 and fixed costs are $30,000 a month. Calculate (a) the break-even quantity, (b) the margin of safety, and (c) the monthly profit.
Step-by-step solution
1. Step 1
  Contribution per unit = price − variable cost per unit.
  $Contribution = 12 - 7 = $5 per meal$
2. Step 2
  (a) Break-even = fixed costs ÷ contribution per unit.
  $Break-even = 30,000 ÷ 5 = 6,000 meals$
3. Step 3
  (b) Margin of safety = actual − break-even output.
  $Margin of safety = 8,000 − 6,000 = 2,000 meals$
4. Step 4
  (c) Profit = total contribution − fixed costs.
  $Profit = (5 \times 8,000) - 30,000 = 40,000 - 30,000 = $10,000$
Answer
Break-even = 6,000 meals; margin of safety = 2,000 meals; monthly profit = $10,000.
Examiner tip
Multi-part calculations reward clean, labelled working. Carry the contribution figure ($5) through all three parts rather than recomputing it each time.
7Effect of a rise in fixed costs on the break-even point
Stretch• IB Business Management Paper 2 style (AO2/AO3)• effect of changes, fixed costs, AO2
Question
BrightDesk (price $10, variable cost$ 6, fixed costs $40,000, break-even 10,000 units) signs a new lease that raises fixed costs to$ 48,000. Calculate the new break-even quantity and comment on the change.
Step-by-step solution
1. Step 1
  Contribution is unchanged because price and variable cost are unchanged.
  $Contribution per unit = 10 - 6 = $4 (unchanged)$
2. Step 2
  Recalculate break-even with the higher fixed costs in the numerator.
  $New break-even = 48,000 ÷ 4 = 12,000 units$
3. Step 3
  Compare with the original 10,000 units.
  $Change = 12,000 − 10,000 = +2,000 units$
Answer
New break-even = 12,000 units — 2,000 units higher. BrightDesk must now sell 2,000 more lamps just to avoid a loss, and its margin of safety at any given sales level shrinks.
Examiner tip
Higher fixed costs raise the numerator, so break-even rises; contribution (the denominator) is untouched. The one-line comment on the shrinking margin of safety earns the interpretation mark.
8Effect of a rise in variable cost on the break-even point
Stretch• IB Business Management Paper 2 style (AO2/AO3)• effect of changes, variable cost, rounding, AO2
Question
A supplier increases BrightDesk's material cost, raising the variable cost per lamp from $6 to$ 7. Price stays at $10 and fixed costs at$ 40,000. Calculate the new break-even quantity and explain the effect.
Step-by-step solution
1. Step 1
  A higher variable cost per unit reduces contribution per unit.
  $New contribution = 10 - 7 = $3 per unit$
2. Step 2
  Recalculate break-even with the lower contribution in the denominator.
  $New break-even = 40,000 ÷ 3 = 13,333.3 units$
3. Step 3
  Round UP to a whole unit — 13,333 units would fall just short of breaking even.
  $New break-even = 13,334 units$
Answer
New break-even ≈ 13,334 units, up from 10,000 — a rise of about 3,334 units caused by contribution falling from $4 to$ 3.
Examiner tip
A falling contribution (denominator) raises break-even sharply. Show the decimal (13,333.3) then round UP to 13,334 — rounding down or to 13,333 is a marked error.
9Compare two pricing options using break-even and profit
Stretch• IB Business Management Paper 2 style (AO3)• effect of changes, decision, profit, AO3
Question
BrightDesk currently sells 15,000 lamps at $10 (variable cost$ 6, fixed costs $40,000). Marketing proposes cutting the price to$ 9, which is forecast to lift sales to 24,000 lamps. Calculate the break-even quantity and profit under BOTH options and advise which is better on the numbers.
Step-by-step solution
1. Step 1
  Current option — contribution and profit at 15,000 units.
  $Contribution = 10 - 6 = $4; Profit = (4 \times 15,000) - 40,000 = $20,000$
2. Step 2
  Current break-even.
  $Break-even = 40,000 ÷ 4 = 10,000 units$
3. Step 3
  Proposed option — lower price cuts contribution to $3 per unit.
  $New contribution = 9 - 6 = $3$
4. Step 4
  Proposed break-even (round up).
  $Break-even = 40,000 ÷ 3 = 13,333.3 → 13,334 units$
5. Step 5
  Proposed profit at the forecast 24,000 units.
  $Profit = (3 \times 24,000) - 40,000 = 72,000 - 40,000 = $32,000$
Answer
Current: break-even 10,000 units, profit $20,000. Proposed: break-even 13,334 units, profit$ 32,000. On the numbers the price cut is better (+$12,000 profit) — BUT only IF the forecast 24,000 units is actually achieved; the higher break-even means more units must sell just to avoid a loss.
Examiner tip
A strong AO3-style answer states the numbers AND the condition attached to them: the extra profit depends entirely on the sales forecast, which the break-even model simply assumes will be met.

Model Answers — Break-even analysis

High-scoring sample answers for break-even analysis on the Cambridge IGCSE paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.

Question 1
IB Business Management style (AO1)2 marks
Define the term contribution per unit. [2]
Model answer
Contribution per unit is the selling price of one unit minus its variable cost per unit. It is the amount each unit sold contributes first towards covering the firm's fixed costs and, once those are covered, towards profit.
Why this scores
1 mark for a correct definition (price − variable cost per unit) and 1 mark for development (that it contributes to fixed costs then profit). It is NOT the same as profit.
Question 2
IB Business Management style (AO1)2 marks
Define the term margin of safety. [2]
Model answer
The margin of safety is the difference between a firm's actual (or budgeted) level of output and its break-even level of output. It shows by how much sales can fall before the business begins to make a loss, and is normally measured in units.
Why this scores
1 mark for 'actual output − break-even output', 1 mark for what it means (the cushion before a loss). Stating the unit (units) shows precision.
Question 3
IB Business Management style (AO1/AO2)2 marks
A firm has fixed costs of $30,000. Its product sells for$ 15 with a variable cost of $9 per unit. Calculate the break-even quantity. [2]
Model answer
Contribution per unit = $15 −$ 9 = $6. Break-even quantity = fixed costs ÷ contribution per unit =$ 30,000 ÷ $6 = 5,000 units.
Why this scores
1 mark for the correct method/working, 1 mark for the correct answer with the unit (5,000 units). An answer with no working caps at 1 mark even if correct.
Question 4
IB Business Management Paper 2 style (AO2)4 marks
A bakery breaks even at 4,000 loaves a week and currently sells 5,200 loaves a week. Calculate its margin of safety and comment on what it means for the business. [4]
Model answer
Margin of safety = actual output − break-even output = 5,200 − 4,000 = 1,200 loaves per week.

This means weekly sales could fall by up to 1,200 loaves — about 23% of current sales (1,200 ÷ 5,200) — before the bakery would drop below break-even and start making a loss. A margin of this size gives a reasonable cushion, but because it is fairly modest the bakery remains exposed to a sharp fall in demand (for example from a new competitor) and should watch sales closely.
Why this scores
AO2: 2 marks for the correct calculation with units, 2 marks for interpretation applied to the business (the cushion before a loss, plus a comment on how safe/risky that is). Converting to a percentage strengthens the interpretation.
Question 5
IB Business Management Paper 2 style (AO2)6 marks
SnackCo sells 20,000 units at $8 each. Variable cost is$ 5 per unit and fixed costs are $45,000. Calculate the break-even quantity, the margin of safety and the profit. [6]
Model answer
Contribution per unit = $8 −$ 5 = $3.

Break-even quantity = fixed costs ÷ contribution = $45,000 ÷$ 3 = 15,000 units.

Margin of safety = actual − break-even = 20,000 − 15,000 = 5,000 units.

Profit = total contribution − fixed costs = ( $3 × 20,000) −$ 45,000 = $60,000 −$ 45,000 = $15,000.
Why this scores
AO2: 2 marks each for break-even, margin of safety and profit (method + answer). Carry the $3 contribution through all three parts. Full marks require units/$ and clear working; stopping at total contribution ($60,000) for 'profit' loses the profit marks.
Question 6
IB Business Management Paper 2 style (AO2)6 marks
A gym breaks even at 800 members (monthly fee $40, variable cost$ 10 per member, fixed costs $24,000). It is considering new equipment that would raise fixed costs to$ 30,000. Analyse the effect of this change on the gym's break-even point. [6]
Model answer
Contribution per member = $40 −$ 10 = $30 (unchanged, since the fee and variable cost do not change).

Original break-even = $24,000 ÷$ 30 = 800 members (as stated).

New break-even = $30,000 ÷$ 30 = 1,000 members.

The extra $6,000 of fixed costs raises the break-even point by 200 members (from 800 to 1,000). Because contribution per member is unchanged, only the numerator rises, so break-even moves up in proportion to the fixed-cost increase. The gym now needs 200 more paying members simply to avoid a loss, and its margin of safety at any given membership level falls by 200 — a meaningful increase in risk unless the new equipment attracts enough extra members to more than offset it.
Why this scores
AO2: marks for recalculating the new break-even (1,000), quantifying the change (+200), and analysing the effect (higher break-even, smaller margin of safety, more risk). Recognising that contribution is unchanged shows secure understanding.
Question 7
IB Business Management Paper 2 style (AO3)10 marks
A manufacturer can move to a larger factory that would raise fixed costs from $50,000 to$ 80,000 but cut the variable cost per unit from $12 to$ 8. The selling price is $20 and the firm expects to sell 6,000 units. Using break-even analysis, evaluate whether the manufacturer should relocate. [10]
Model answer
The numbers. Current factory: contribution = $20 −$ 12 = $8; break-even =$ 50,000 ÷ $8 = 6,250 units; at 6,000 units profit = ($ 8 × 6,000) − $50,000 =$ 48,000 − $50,000 = **−$ 2,000 (a loss), because 6,000 is below the 6,250 break-even. New factory: contribution = $20 −$ 8 = $12; break-even =$ 80,000 ÷ $12 = 6,667 units; at 6,000 units profit = ($ 12 × 6,000) − $80,000 =$ 72,000 − $80,000 = **−$ 8,000 (a larger loss).

Analysis. At the expected 6,000 units, break-even analysis argues AGAINST relocating: although the new factory has much higher contribution per unit ( $12 vs$ 8), its far higher break-even (6,667 vs 6,250 units) is not reached at 6,000 units, and the loss is actually bigger (− $8,000 vs −$ 2,000). The higher contribution only pays off at high volumes — the two options break even against each other at 7,500 units (where the $4 extra contribution × units = the$ 30,000 extra fixed cost). Above ~7,500 units the new factory is more profitable; below it, the current one is.

Evaluation and judgement. On the forecast of 6,000 units the firm should not relocate — it worsens the loss and raises break-even. Relocation only makes sense if management genuinely expects demand to grow well beyond 7,500 units, in which case the higher-contribution structure becomes far more profitable. However, this decision rests on break-even's assumptions: it treats the 6,000-unit forecast as certain, assumes all output is sold, and assumes costs and price stay linear and constant — none of which is guaranteed. The bigger factory may also bring extra capacity for future growth, benefits break-even ignores. Recommendation: stay in the current factory unless there is strong, evidence-based confidence that sales will rise sustainably above ~7,500 units; break-even should inform this decision but, given its assumptions, must be combined with a realistic demand forecast and qualitative factors before committing.
Why this scores
Top-band AO3 needs: correct figures for BOTH options (contribution, break-even, profit/loss at 6,000), the insight that the higher-contribution option only wins at high volume (the crossover ~7,500 units), a clear justified recommendation, AND explicit acknowledgement of the model's assumptions/limitations. A numbers-only answer with no evaluation of the assumptions stays in the middle bands.
Question 8
IB Business Management Paper 2 style (AO3)10 marks
A clothing retailer sells 10,000 T-shirts a year at $25 (variable cost$ 15, fixed costs $80,000). It is considering cutting the price to$ 22 to boost sales to a forecast 14,000 units. Using break-even analysis, recommend whether it should cut the price. [10]
Model answer
The numbers. Current: contribution = $25 −$ 15 = $10; break-even =$ 80,000 ÷ $10 = 8,000 units; margin of safety = 10,000 − 8,000 = 2,000 units; profit = ($ 10 × 10,000) − $80,000 = **$ 20,000**. After the price cut: contribution = $22 −$ 15 = $7; break-even =$ 80,000 ÷ $7 = 11,429 units (rounded up); margin of safety at the forecast 14,000 = 14,000 − 11,429 = 2,571 units; profit = ($ 7 × 14,000) − $80,000 =$ 98,000 − $80,000 = **$ 18,000**.

Analysis. The price cut is a trade-off. It raises the break-even point sharply (8,000 → 11,429 units) because each unit now contributes only $7 instead of$ 10, so the retailer must sell far more just to avoid a loss. On the forecast of 14,000 units, profit actually falls by $2,000 (from$ 20,000 to $18,000) — the extra 4,000 units of sales do not fully offset the$ 3 lost contribution on every unit. The margin of safety does improve slightly in absolute units (2,000 → 2,571), but as a proportion of a much larger required output the position is riskier.

Evaluation and judgement. On these figures the retailer should not cut the price: it lowers profit and lifts break-even, increasing risk. The cut would only be worthwhile if sales rose even further than forecast — profit would match the current $20,000 only at (80,000 + 20,000) ÷ 7 ≈ 14,286 units, and beat it beyond that. Crucially, the whole case depends on the forecast of 14,000 units, which break-even simply assumes will be achieved; if demand is less price-elastic than hoped, the retailer ends up with lower price, lower contribution AND lower volume. Recommendation: keep the current price unless there is robust evidence (e.g. reliable market research) that demand will exceed ~14,300 units; break-even usefully quantifies the risk here but its reliance on an unproven sales forecast and constant costs means it should support, not dictate, the pricing decision.
Why this scores
AO3 top band: correct figures for both prices (contribution, break-even, margin of safety, profit), the key insight that a lower price raises break-even and cuts profit unless volume rises enough, a justified recommendation, and explicit treatment of the forecast-dependence/elasticity limitation. Reward the crossover reasoning (~14,286 units).
Question 9
IB Business Management Paper 2 style (AO3)10 marks
Evaluate the usefulness of break-even analysis as a decision-making tool for a small business launching a new product. [10]
Model answer
Why it is useful. For a small business launching a new product, break-even analysis is a quick, low-cost and visual planning tool. It shows the minimum output that must be sold to avoid a loss, which is invaluable when cash is tight and the owner needs a clear, realistic sales target. It supports 'what-if' analysis — the owner can instantly see how a different price, a rise in material costs, or extra fixed costs (e.g. new equipment) would shift the break-even point. The margin of safety flags how exposed the launch is to disappointing sales, and a clear break-even chart strengthens a loan or investment application by showing a bank exactly when the product becomes viable.

Why its usefulness is limited. The analysis rests on simplifying assumptions that rarely hold, especially for a new product. It assumes costs and revenue are linear — yet a small firm may get bulk discounts at higher output (lowering variable cost) or have to discount to shift stock (lowering revenue per unit). It assumes a single product at one price, whereas many launches involve variants. It assumes all output is sold, ignoring unsold stock — a real risk for an untested product. Most importantly, it is only as good as its forecast data: a new product has no sales history, so the fixed cost, variable cost and — above all — the expected sales figures are estimates, and 'garbage in' gives 'garbage out'. It is also a static snapshot that ignores competitor reactions and changing market conditions.

Judgement. Break-even analysis is genuinely useful as a first-pass planning and communication tool for a small-business launch — it sets a clear target, quantifies risk and supports finance bids at little cost. But because its assumptions are weakest exactly where a new product is most uncertain (unproven demand, single-product linear costs), it should inform rather than dictate the launch decision. The owner should treat the break-even output as a target to test against realistic, research-based sales forecasts and combine it with qualitative judgement — competitor behaviour, brand strength and the firm's objectives — rather than launching simply because the numbers 'break even'. Used this way, its benefits outweigh its limitations; used as the sole basis for the decision, its assumptions make it unreliable.
Why this scores
AO3 top band: balanced evaluation of BOTH uses and limitations, applied specifically to a small-business new-product launch (not generic), and a clear, justified overall judgement (decision-support, not decision-maker). Answers that only list uses OR only list limitations, or omit a judgement, cannot reach the top band.

Key Formulae — Break-even analysis

The formulae you need to memorise for break-even analysis on the Cambridge IGCSE paper, with every variable defined in plain English and a note on when to use it.

Contribution per unit
$\text{Contribution per unit} = \text{Selling price} - \text{Variable cost per unit}$
$Selling price$
price charged for one unit
$Variable cost per unit$
cost that varies with each unit made (materials, direct labour)
When to use
The starting point of every break-even calculation — the amount each unit contributes to fixed costs and then profit.
Example
10 - 6 = 4 (i.e. $4 per unit)
Break-even quantity
$\text{Break-even quantity} = \dfrac{\text{Fixed costs}}{\text{Contribution per unit}}$
$Fixed costs$
total costs that do not vary with output
$Contribution per unit$
selling price − variable cost per unit
When to use
To find the output where total revenue = total costs (no profit/loss). Round UP to a whole unit.
Example
40,000 ÷ (10 − 6) = 10,000 units
Total contribution
$\text{Total contribution} = \text{Contribution per unit} \times \text{Units sold}$
$Contribution per unit$
selling price − variable cost per unit
$Units sold$
quantity of output sold
When to use
To scale contribution up to the whole output before deducting fixed costs to find profit.
Example
4 × 15,000 = 60,000 (i.e. $60,000)
Profit
$\text{Profit} = \text{Total contribution} - \text{Fixed costs}$
$Total contribution$
contribution per unit × units sold
$Fixed costs$
total costs that do not vary with output
When to use
To find profit (or loss) at a given level of output. A negative result is a loss.
Example
60,000 − 40,000 = 20,000 (i.e. $20,000 profit)
Margin of safety
$\text{Margin of safety} = \text{Actual output} - \text{Break-even output}$
$Actual output$
actual or budgeted units sold
$Break-even output$
the break-even quantity in units
When to use
To show how far sales can fall before a loss. Measured in units (× selling price for $).
Example
15,000 − 10,000 = 5,000 units
Target-profit output
$\text{Target-profit output} = \dfrac{\text{Fixed costs} + \text{Target profit}}{\text{Contribution per unit}}$
$Fixed costs$
total costs that do not vary with output
$Target profit$
the desired level of profit
$Contribution per unit$
selling price − variable cost per unit
When to use
To find the output needed to achieve a specific target profit (not just to break even).
Example
(40,000 + 16,000) ÷ 4 = 14,000 units

Key Definitions and Keywords — Break-even analysis

Definitions to memorise and the exact keywords mark schemes credit for break-even analysis answers — sharpened from recent examiner reports for the 2026 Cambridge IGCSE sitting.

Contribution per unit
Examiner keyword
The selling price of one unit minus its variable cost per unit; the amount each unit contributes towards fixed costs and then profit.
Example
Price $10 − variable cost$ 6 = $4 contribution per unit.
Related: Total contribution, Break even quantity
Total contribution
Contribution per unit multiplied by the number of units sold; the total amount available to cover fixed costs and generate profit.
Example
$4 × 15,000 units =$ 60,000.
Related: Contribution per unit, Profit
Fixed costs
Examiner keyword
Costs that do not change with the level of output in the short run, such as rent, salaries and insurance.
Example
$40,000 rent and salaries per year, whether 0 or 20,000 units are made.
Related: Variable costs, Total costs
Variable cost per unit
Examiner keyword
The cost of producing one extra unit — costs that vary directly with output, such as raw materials and direct labour.
Example
$6 of materials and direct labour per lamp.
Related: Fixed costs, Contribution per unit
Break-even point
Examiner keyword
The level of output at which total revenue exactly equals total costs, so the business makes neither a profit nor a loss.
Example
Where the total-revenue line crosses the total-cost line on a break-even chart.
Related: Break even quantity, Break even chart
Break-even quantity
Examiner keyword
The number of units that must be sold to break even, found by dividing fixed costs by the contribution per unit.
Example
$40,000 ÷$ 4 = 10,000 units.
Related: Break even point, Contribution per unit
Margin of safety
Examiner keyword
The difference between the actual (or budgeted) level of output and the break-even level of output; how far sales can fall before a loss is made.
Example
15,000 actual − 10,000 break-even = 5,000 units.
Related: Break even quantity
Break-even chart
A graph plotting output (x-axis) against costs and revenue (y-axis), showing the fixed-cost, total-cost and total-revenue lines and the break-even point.
Example
Used to read off the break-even quantity, margin of safety and profit/loss regions.
Related: Break even point, Total cost, Total revenue
Total revenue
The total income from sales, calculated as selling price multiplied by the quantity sold; plotted from the origin on a break-even chart.
Example
$10 × 10,000 units =$ 100,000.
Related: Total cost, Break even chart
Total cost
Fixed costs plus total variable costs at a given level of output; plotted from the fixed-cost intercept (not the origin) on a break-even chart.
Example
$40,000 fixed + ($ 6 × 10,000) variable = $100,000 at 10,000 units.
Related: Fixed costs, Variable costs, Total revenue
Selling price
The price charged to the customer for one unit of the product; the first term in the contribution formula.
Example
$10 per lamp.
Related: Contribution per unit, Total revenue
Target profit
A specific level of profit a business aims to achieve, used to calculate the output required beyond the break-even point.
Example
A $16,000 target profit requires 14,000 units at$ 4 contribution and $40,000 fixed costs.
Related: Target profit output, Profit
Profit
The surplus once total contribution exceeds fixed costs; calculated as total contribution minus fixed costs. A negative figure is a loss.
Example
$60,000 total contribution −$ 40,000 fixed costs = $20,000 profit.
Related: Total contribution, Loss
Loss
The shortfall when total contribution is less than fixed costs, i.e. when output is below the break-even quantity.
Example
At 8,000 units: ( $4 × 8,000) −$ 40,000 = −$8,000 (a loss).
Related: Profit, Break even point

Common Mistakes and Misconceptions — Break-even analysis

The traps other students keep falling into on break-even analysis questions — taken from recent Cambridge IGCSE examiner reports and mark schemes — and how to avoid them.

✕Using total variable cost instead of variable cost PER UNIT when calculating contribution.
IB Business Management examiner reports — recurring calculation error
Why it happens
Data is sometimes given as a total (e.g. 'variable costs of $60,000'), and students subtract it straight from the selling price without first finding the per-unit figure.
How to avoid it
Contribution per unit = selling price − variable cost of ONE unit. If only a total variable cost is given, divide it by the number of units first to get the per-unit cost.
✕Giving the margin of safety in dollars when units are required (or vice-versa), or omitting the unit altogether.
IB Business Management examiner reports — margin-of-safety questions
Why it happens
Students forget that margin of safety is defined in units and convert to $ automatically, or lose track of what the question asked for.
How to avoid it
Margin of safety = actual output − break-even output, in UNITS. Only multiply by selling price to get $ if the question explicitly asks for the margin of safety in revenue. Always state the unit.
✕Treating break-even's assumptions as realistic and recommending a decision purely because the firm 'exceeds break-even'.
IB Business Management examiner reports — weak AO3 evaluation
Why it happens
Break-even produces a clean number that looks authoritative, so students trust it and skip evaluation.
How to avoid it
In AO3 answers, always question the assumptions — linear costs/revenue, single product, all output sold, constant prices/costs, and an unproven sales forecast — and treat break-even as decision-SUPPORT, not the decision.
✕Mislabelling the break-even chart — drawing the total-cost line from the origin, or the total-revenue line from the fixed-cost intercept.
IB Business Management examiner reports — 'construct' questions
Why it happens
Students confuse which line starts where and draw all lines from the origin.
How to avoid it
TR starts at the ORIGIN (0 units = $0 revenue); TC starts on the y-axis at the level of FIXED COSTS (0 units still incurs fixed costs); the FC line is horizontal. Label all three lines plus the break-even point and margin of safety.
✕Rounding a decimal break-even quantity down (or to the nearest whole number) instead of UP.
IB Business Management examiner reports — calculation precision
Why it happens
Students apply ordinary rounding rules and round 13,333.3 to 13,333.
How to avoid it
You cannot sell a fraction of a unit, and selling fewer than the exact figure leaves a loss — so always round the break-even quantity UP to the next whole unit (13,333.3 → 13,334).
✕Stopping at total contribution and calling it profit (forgetting to subtract fixed costs).
IB Business Management examiner reports — profit calculation error
Why it happens
Contribution and profit both feel like 'the money made', so students report the contribution figure as the profit.
How to avoid it
Profit = total contribution − fixed costs. Contribution only becomes profit AFTER fixed costs are covered; always complete the final subtraction.

Break-even analysis — contribution, the break-even quantity, break-even charts and the margin of safety

Change

Effect on contribution

Effect on break-even quantity

Selling price rises

Contribution up

Break-even falls

Selling price falls

Contribution down

Break-even rises

Variable cost per unit rises

Contribution down

Break-even rises

Variable cost per unit falls

Contribution up

Break-even falls

Fixed costs rise

Unchanged

Break-even rises

Fixed costs fall

Unchanged

Break-even falls

Why it is useful. For a small business launching a new product, break-even analysis is a quick, low-cost and visual planning tool. It shows the minimum output that must be sold to avoid a loss, which is invaluable when cash is tight and the owner needs a clear, realistic sales target. It supports 'what-if' analysis — the owner can instantly see how a different price, a rise in material costs, or extra fixed costs (e.g. new equipment) would shift the break-even point. The margin of safety flags how exposed the launch is to disappointing sales, and a clear break-even chart strengthens a loan or investment application by showing a bank exactly when the product becomes viable.

Why its usefulness is limited. The analysis rests on simplifying assumptions that rarely hold, especially for a new product. It assumes costs and revenue are linear — yet a small firm may get bulk discounts at higher output (lowering variable cost) or have to discount to shift stock (lowering revenue per unit). It assumes a single product at one price, whereas many launches involve variants. It assumes all output is sold, ignoring unsold stock — a real risk for an untested product. Most importantly, it is only as good as its forecast data: a new product has no sales history, so the fixed cost, variable cost and — above all — the expected sales figures are estimates, and 'garbage in' gives 'garbage out'. It is also a static snapshot that ignores competitor reactions and changing market conditions.

Judgement. Break-even analysis is genuinely useful as a first-pass planning and communication tool for a small-business launch — it sets a clear target, quantifies risk and supports finance bids at little cost. But because its assumptions are weakest exactly where a new product is most uncertain (unproven demand, single-product linear costs), it should inform rather than dictate the launch decision. The owner should treat the break-even output as a target to test against realistic, research-based sales forecasts and combine it with qualitative judgement — competitor behaviour, brand strength and the firm's objectives — rather than launching simply because the numbers 'break even'. Used this way, its benefits outweigh its limitations; used as the sole basis for the decision, its assumptions make it unreliable.

Break-even analysis

Detailed Study Notes

At a glance

What you’ll learn

Contribution — the engine of break-even analysis

The break-even quantity — the formula method

The break-even chart — construct and interpret

Margin of safety, profit and target profit

The effect of changes in price, variable cost and fixed cost

Uses and limitations of break-even analysis

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1Calculate the contribution per unit

2Calculate the break-even quantity

3Calculate the margin of safety

4Calculate the profit at a given level of output

5Calculate the output needed for a target profit

6Calculate margin of safety and profit together

7Effect of a rise in fixed costs on the break-even point

8Effect of a rise in variable cost on the break-even point

9Compare two pricing options using break-even and profit

Contribution per unit

Break-even quantity

Total contribution

Profit

Margin of safety

Target-profit output

Contribution per unit

Total contribution

Fixed costs

Variable cost per unit

Break-even point

Break-even quantity

Margin of safety

Break-even chart

Total revenue

Total cost

Selling price

Target profit

Profit

Loss

✕Using total variable cost instead of variable cost PER UNIT when calculating contribution.

✕Giving the margin of safety in dollars when units are required (or vice-versa), or omitting the unit altogether.

✕Treating break-even's assumptions as realistic and recommending a decision purely because the firm 'exceeds break-even'.

✕Mislabelling the break-even chart — drawing the total-cost line from the origin, or the total-revenue line from the fixed-cost intercept.

✕Rounding a decimal break-even quantity down (or to the nearest whole number) instead of UP.

✕Stopping at total contribution and calling it profit (forgetting to subtract fixed costs).

Break-even analysis

Detailed Study Notes

At a glance

What you’ll learn

Contribution — the engine of break-even analysis

The break-even quantity — the formula method

The break-even chart — construct and interpret

Margin of safety, profit and target profit

The effect of changes in price, variable cost and fixed cost

Uses and limitations of break-even analysis

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1Calculate the contribution per unit

2Calculate the break-even quantity

3Calculate the margin of safety

4Calculate the profit at a given level of output

5Calculate the output needed for a target profit

6Calculate margin of safety and profit together

7Effect of a rise in fixed costs on the break-even point

8Effect of a rise in variable cost on the break-even point

9Compare two pricing options using break-even and profit