7115 · 4.2
Costs, scale of production and break-even analysis
Break-even is the output level where total revenue equals total cost — no profit, no loss. Each unit sold contributes toward fixed costs; once enough contribution is earned, the business covers all costs.
Need to know
What you need to know
- **Common error:** Using full (absorption) unit cost instead of variable cost — always deduct only variable costs from selling price.
- **Units matter:** Examiners often give fixed costs in £000 and VC in £ per unit — convert consistently before dividing.
- **Zero contribution:** If contribution per unit is zero, break-even is undefined — the price only covers variable costs.
Explanation
Where profit starts
- Contribution per unit = selling price − variable cost per unit.
- Break-even output (units) = fixed costs ÷ contribution per unit.
- On a chart, the total revenue and total cost lines cross at break-even.
- Margin of safety = actual (or budgeted) output − break-even output.
- State assumptions (constant price, linear costs) when evaluating.