Business revenue, costs and profits - EdexcelBreak-even level of output
Break-even is the point at which a business is not making a profit or a loss. Businesses calculate their break-even point and are able to plot this information on a break-even graph.
Break-even is the point at which revenue and total costs are the same, meaning the business is making neither a profit nor a loss. The break-even level of output informs a business of how many products it needs to sell to reach the break-even point (BEP).
The result of this calculation is always how many products a business needs to sell in order to break even. The calculation in brackets must be completed first.
Example
A business that sells T-shirts wants to find out what its BEP is.
Its fixed costsFixed costs are expenses a business has to pay which do not change with output, eg rent. are £400.
The selling price (per unit) is £10.
The variable costsVariable costs are expenses a business has to pay which change directly with output, eg raw materials. (per unit) are £6.
Therefore:
Break-even = £400 ÷ (£10 − £6)
= £400 ÷ £4
= 100
So this business breaks even when it sells 100 T-shirts.
Sometimes the result is a little more complex, as the BEP may not be a whole number (eg 100.12). In such cases, the business would always need to sell an additional item in order to break even. An example of this is shown below:
Break-even = £401 ÷ (£10 − £6)
= £401 ÷ £4
= 100.25 T-shirts
In this case, the business would need to sell 101 T-shirts to break even.
