Break-even

Overview

The break-even formula and contribution per unit, worked break-even quantities rounded up, how price and cost changes move break-even, reading a break-even chart, and the method's limitations.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is break-even?

   Model answer

   Break-even is the level of output at which total costs equal total revenue. A business at break-even makes neither a profit nor a loss.

2. 2

   State the formula for break-even quantity.

   Model answer

   Break-even quantity = fixed costs ÷ (selling price per unit − variable cost per unit).

3. 3

   What is contribution per unit, and what does it pay for?

   Model answer

   Contribution per unit is the selling price minus the variable cost of one unit. Contribution pays towards fixed costs first and then provides profit.

4. 4

   A candle maker has fixed costs of £6,000 a month. Each candle sells for £12 and has variable costs of £4. Calculate the break-even quantity.

   Model answer

   The break-even quantity is 750 candles a month. £6,000 ÷ (£12 − £4) = 750.

5. 5

   A food truck has fixed costs of £3,600 a month. It sells burgers at £7.50 each, with variable costs of £3.00 per burger. How many burgers must it sell to break even?

   Model answer

   The food truck must sell 800 burgers a month to break even. £3,600 ÷ (£7.50 − £3.00) = 800.

6. 6

   A card shop has fixed costs of £5,000 a month. Each card sells for £3.50 and costs £1.10 in variable costs. What is the break-even quantity?

   Model answer

   The card shop breaks even at 2,084 cards a month. £5,000 ÷ £2.40 = 2,083.3, which is rounded up to the next whole card.

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