Break-even - Cambridge OCRThe concept of break-even

The break-even point

Break-even is the point at which all of the total costs incurred by a business are covered by the total revenue that they receive from selling the goods that they have made. So total revenue and total costs are the same, meaning the business is making neither a profit nor a loss.

The number of units that a business needs to sell in order to cover their total costs from their total revenue is called the break-even level of output. This is useful information, since it informs a business of how many products it needs to sell to reach the break-even point (BEP).

The break-even graph

The (BEP) can be illustrated visually using a break-even graph. A break-even graph plots costs and revenues against output, showing what total revenue, fixed costs and total costs are expected to be at each level of output. Where level of output, total revenue and total costs are equal is the BEP.

For example, a business selling t-shirts at a price of £10 per unit incurs fixed costs of £400, and variable costs of £6 per unit. Their break-even graph would be as shown:

The graph above demonstrates a break-even point (BEP) of 100 units.

In this example, if the business is not able to sell at least 100 t-shirts (units) then it will make a loss.

If the business produces and sells more than 100 t-shirts (units) it will make a profit. Once the BEP has been reached, a business will have a margin of safety. This is the amount by which sales exceed the BEP, and can be useful when making business decisions using break-even.