National 5BusinessSQABusiness ManagementRevision NotesManagement of FinanceBreak-EvenBreak-Even Calculations

Break-Even Calculations (SQA National 5 Business Management): Revision Note

Exam code: X810 75

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Updated on

The break-even concept

  • Break-even analysis is a financial tool used to determine the number of units a business must sell to reach a point where its revenue equals its costs

    • It helps businesses understand the minimum level of sales or output they need to achieve in order to cover all costs

    • This helps business managers make informed decisions about pricing and production volumes

Components of break-even analysis

Three interlocking hexagons labelled: Variable Costs in yellow, Fixed Costs in blue, and Revenue in pink, representing financial concepts.
Variable costs, fixed costs and sales revenue are all used in calculating the break-even point  

  • Information on costs and revenue can be found here

Benefits of break-even analysis

Benefit

Explanation

Profitability assessment

  • It helps identify the level of sales required to avoid losses and provides a target for achieving profits

Cost control

  • Break-even analysis helps in identifying fixed and variable costs and their impact on the business

Pricing decisions

  • Break-even analysis helps managers set prices at a level that generates sufficient revenue to cover costs and generate a profit

Financial planning

  • Break-even analysis can help with target setting, such as realistic sales targets and plans for necessary expenses

Performance monitoring

  • By comparing actual sales and costs against the break-even point, businesses can assess their financial health and track progress

Decision making

  • It helps in weighing up the potential risks and rewards associated with different decisions

Limitations of break-even analysis

Flowchart showing limitations of break-even analysis, including issues with multiple products, data accuracy, linear costs, output assumptions, and chart amendments.

Calculating break-even

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

BEP colon space TR space equals space TC

Case Study

Logo of Highland Hampers with a picnic basket illustration, featuring mountains and sun, on a green background.

Highland Hampers is a small business based in Inverness that produces and sells gift hampers filled with Scottish products such as shortbread, honey, and chutney. The business is considering launching a new “Taste of the Highlands” hamper, priced at £40 each.

Before starting production, the owner, Isla Maclean, decides to carry out a break-even calculation to find out how many hampers must be sold to cover all costs.

Cost and pricing information

  • Fixed costs: £4,000 per month, including rent, utilities and insurance

  • Variable cost per hamper: £25, which covers the cost of ingredients, packaging and delivery

  • Selling price per hamper: £50

Table showing costs and revenue for hampers. The row for 160 hampers is highlighted, with total costs and revenue both at £8,000.

  • As total costs are equal to revenue at 160 units, this is the break-even point

The breakeven formula

  • The break-even point can also be calculated using a formula

space Breakeven space point space equals space fraction numerator Fixed space costs over denominator open parentheses Selling space price space minus space Variable space cost space per space unit close parentheses end fraction

Worked Example

Montrose Burgers has the following financial information for the month of May

 

£

Raw materials for each burger

2.10

Packaging for each burger

0.20

Fixed costs

1730

Selling price of each burger

4.95

Using the information in the table, calculate the level of output required to break even in May. You are advised to show your workings.

(2)

Step 1: Calculate the variable costs per burger

Variable space cost space per space burger space equals space Raw space materials space plus space Packaging equals space £ 2.10 space plus space £ 0.20 space equals space £ 2.30  (1)

Step 2: Substitute the values into the break-even formula

  Break space even space point space in space units space equals space fraction numerator Fixed space Cost over denominator stretchy left parenthesis Selling space price space minus space Variable space cost stretchy right parenthesis end fraction equals space fraction numerator 1 comma 730 over denominator stretchy left parenthesis 4.95 space minus space 2.30 stretchy right parenthesis end fraction equals space fraction numerator 1 comma 730 over denominator stretchy left parenthesis 2.65 stretchy right parenthesis end fraction equals space 652.83      (1)

Step 3: Round up to the nearest unit

  • 653 burgers need to be sold to break even in May

Examiner Tips and Tricks

Always round up the break-even point to the nearest whole unit

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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.