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A LevelBusinessAQARevision Notes5. Financial Management5.2 Financial PerformanceCalculating Break-Even

Calculating Break-Even (AQA A Level Business): Revision Note

Exam code: 7132

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Updated on

Break-even calculations

  • The break-even point is the level of output at which the total revenue is exactly equal to total costs

    • At the break even point the business is making neither a profit nor a loss

  • Break-even calculations include the following:

    • Calculating the contribution

    • Calculating the break-even point

    • Calculating the margin of safety

    • Calculating the profit or loss

    • Calculating the impact on break-even of a change to costs or revenue

Calculating contribution

  • Contribution per unit is used to calculate the break-even point

    • It is calculated using the formula

Contribution space space space space space space equals space space space space space space space space Selling space price space minus space Variable space cost space of space producing space one space unit

  • It is called contribution, as once the variable cost of the unit has been paid, the remainder of the selling price contributes to paying the fixed costs of the business

Calculating break-even

  • Break-even is calculated using the formula

Break space Even space Point space space space space space space space space equals space space space space space space space space space space fraction numerator Fixed space Costs over denominator Contribution space per space unit end fraction

Worked Example

Selected cost and revenue data for Cannock Chase Glamping

 

£

Revenue per pod per night

95

Variable costs per pod per night

19

Annual fixed costs

55,000

Using the information in the table, calculate how many pods need to be occupied each month for Cannock Chase Glamping to break even.

[4]

Step 1 - State the formula to calculate the break-even point

Break space Even space Point equals space space space space space space space space space space space space space space space space space fraction numerator Fixed space Costs over denominator Contribution space per space unit end fraction space          (1)

Step 2 - Calculate the contribution

Contribution space equals space Selling space price space minus space Variable space cost space per space unit space space equals space £ 95 space minus space £ 19 equals space £ 76(1)

Step 3 - Apply the formula to calculate the break-even point

equals space fraction numerator £ 55 comma 000 over denominator £ 76 end fraction equals space 723.68   (1)

Step 4 - Always round UP to the nearest whole number because only whole products can be sold

723.68 space equals space 724 space camping space pods space space    (1)

Calculating the margin of safety

  • The margin of safety is the difference between the actual level of output of a business and its break even level of output

  • The margin of safety can be calculated using the following formula

Margin space of space Safety space equals space Actual space output space minus space Break space even space output

Worked Example

The cost, sales and revenue for an electric bicycle manufacturer are presented in the table below

Annual fixed costs

£42,000

Selling price per unit

£750

Variable cost per unit

£350

Number of units sold

240

Using the data, calculate the margin of safety. You are advised to show your workings. 

[3]

Step 1 - Calculate the contribution

Contribution space equals space Selling space price space minus space Variable space cost space per space unit space space equals space £ 750 space minus space £ 350 equals space £ 400 (1)

Step 2 - Apply the formula to calculate the break even point

equals space fraction numerator £ 42 comma 000 over denominator £ 400 end fraction minus space 105 space units  (1)

Step 3 - Apply the formula to calculate the margin of safety

equals space 240 space units space minus space 105 space units equals space 135 space units   (1)

Calculating profit or loss

  • Total contribution is used to calculate profit or loss

    • Total contribution is calculated using the formula

Total space contribution space equals space Revenue space minus space Total space variable space costs

  • Once total contribution is calculated, the following formula determines whether a business has made a profit or a loss

Profit space open parentheses Loss close parentheses equals space Total space contribution space minus space Total space fixed space costs

Worked Example

Treetops is an outdoor activity centre. In 2024 it earned revenue of £462,540 with fixed costs of £281,720 and total variable costs of £131,280.

Calculate the total profit made by Treetops in 2024.

[3]

Step 1: Calculate the total contribution

Total space contribution space equals space Revenue space minus space Total space variable space costs equals space £ 462 comma 540 space minus space £ 131 comma 280 equals space £ 331 comma 260 (1)

Step 2: Use the contribution figure to calculate profit

Profit space open parentheses Loss close parentheses space equals space Total space contribution space minus space Total space fixed space costs equals space £ 331 comma 260 space minus space £ 281 comma 720 equals space £ 49 comma 540 (1)

  • Treetops made a profit of £49,540 in 2024 (1)

The impact of changes in price, output and costs on the break-even point

  • Changes in the selling price, fixed costs and variable costs have an impact on the break even point

Diagram showing factors affecting break-even point: Lower selling price, higher fixed and variable costs increase it; higher price, lower costs decrease it.
Changes in the selling price, fixed costs and variable costs impact the break even point

Explanation of the impact of changes

Change

Impact

Why it matters

Rise in variable costs

  • Contribution per unit falls because each unit now costs more to make

  • Break-even output rises (more units must be sold to cover the same fixed costs)

  • The break-even revenue line shifts upward on a graph

  • Profit margin per unit narrows

  • Managers may seek to increase prices, improve efficiency or find cheaper suppliers

Fall in variable costs

  • Contribution per unit rises

  • Break-even output falls (fewer units are needed to cover fixed costs)

  • The break-even revenue line shifts downward

  • The business reaches profit sooner and has a greater margin of safety before losses begin

Rise in fixed costs

  • The fixed-cost figure increases while contribution per unit stays the same

  • Break-even output rises because a larger fixed-cost value must be covered

  • The risk of loss grows if sales volume cannot be expanded

  • Management may cut spending or look to increase the scale of production

Fall in fixed costs

  • The fixed-cost figure decreases

  • Break-even output falls and profitability is reached sooner

  • More of each month’s sales revenue becomes profit once the lower fixed cost value is covered

Rise in selling price

  • Contribution per unit rises, as long as the variable cost per unit is unchanged

  • Break-even output falls because each sale contributes more toward fixed costs

  • Higher prices might reduce demand

  • If the volume of sales drops significantly (price elastic demand), the benefit of higher prices could disappear

Fall in selling price

  • Contribution per unit falls

  • Break-even output rises as more units need to be sold to cover fixed costs

  • A lower price may boost demand

  • The business must judge whether the extra sales volume really will arrive and cover the larger break-even quantity

Worked Example

PART 1 - An increase in the selling price

Roleplay Rascals is an indoor play centre for pre-school children. It currently charges £11 per child per play session. It incurs monthly fixed costs of £8,200 and each play session costs £2.30 on average per child. On average, 1,400 play sessions are sold each month.

Calculate the impact on Roleplay Rascal's break-even point if the selling price per play session is increased by £1.

[4]

Step 1: Calculate the current break-even point

BEP space equals space fraction numerator Fixed space costs over denominator Contribution end fraction equals space fraction numerator £ 8 comma 200 over denominator £ 11 space minus space £ 2.30 end fraction equals space fraction numerator £ 8 comma 200 over denominator £ 8.70 end fraction equals space 943 space play space sessions (1)

Step 2: Calculate the new break-even point

equals space fraction numerator £ 8 comma 200 over denominator £ 12 space minus space £ 2.30 end fraction equals space fraction numerator £ 8 comma 200 over denominator £ 9.70 end fraction equals space 846 space play space sessions (1)

Step 3: Calculate the change

equals space 943 space play space sessions space minus space 846 space play space sessions equals space 97 space play space sessions (1)

  • The break-even point falls by 97 units (1)

Worked Example

PART 2 - An increase in staffing costs

Following the price increase, fixed costs rise to £9,600 when a new staff member is appointed.

Calculate the impact on Roleplay Rascal's break-even point given this increase in staffing costs.

[3]

Step 1: Calculate the new break-even point

BEP space equals space fraction numerator Fixed space costs over denominator Contribution end fraction equals space fraction numerator £ 9 comma 600 over denominator £ 12 space minus space £ 2.30 end fraction equals space fraction numerator £ 9 comma 600 over denominator £ 9.70 end fraction equals space 990 space play space sessions (1)

Step 2: Calculate the change

equals space 990 space play space sessions space minus space 846 space play space sessions equals space 144 space play space sessions (1)

  • The break-even point rises by 144 units (1)

Worked Example

PART 3 - A decrease in variable costs

Roleplay Rascals' manager shops around for a better deal on drawing and painting supplies. This reduces the variable costs by 20%.

Calculate the impact on Roleplay Rascal's break-even point given this reduction in variable costs.

[4]

Step 1: Calculate the new variable cost per unit

equals space £ 2.30 space cross times space 0.2 equals space £ 0.46 equals space £ 2.30 space equals space £ 0.46 equals space £ 1.84 (1)

Step 2: Calculate the new break-even point

BEP space equals space fraction numerator Fixed space costs over denominator Contribution end fraction equals space fraction numerator £ 9 comma 600 over denominator £ 12 space minus space £ 1.84 end fraction equals space fraction numerator £ 9 comma 600 over denominator £ 10.16 end fraction equals space 945 space play space sessions (1)

Step 3: Calculate the change

equals space 990 space play space sessions space minus space 945 space play space sessions equals space 45 space play space sessions (1)

  • The break-even point falls by 45 units (1)

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    Author
    Reviewer
    Lisa Eades

    Author: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

    Steve Vorster

    Reviewer: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.