A-Level AQA Business Revision: Unit 1(Part 10) : Break Even

Break even - When the business is not making a profit or loss, but making enough to cover the costs.

Example of break even:

Sales = £100,000

Costs = £100,000

Profit = £0 <------- This is evidence that the business has broke even as they have covered the costs without making a profit or loss.

Break even is useful as it helps the business find out how many sales they need to cover their costs.

Example:

My business' costs are £30,000. <----- I need to cover these costs.

My selling price is £3.

£30,000/£3 = 10,000 sales.

I need to sell 10,000 products to break even <---- This is known as BREAK EVEN OUTPUT

More specifically for the BUSS1 exam, you'll need to know how to work out break even output. To do this, you need the CONTRIBUTION

Contribution Formula:

Contribution = Selling price - Variable costs

You can then use contribution to work out the break even output

Break Even Output Formula:

Break Even Output = Fixed costs

Contribution

You will also need to be able to draw graphs for break even.

This is what it looks like:

Margin of safety - The difference in output between the intended amount, and the amount required to break even.

It is the past the point at which the business is making profit and is 'safe'

Margin Of Safety Formula:

Margin of safety = Current Output - Break even output

There is also an alternative way to calculating profit using break even components:

Alternate Profit Formula:

Profit/Loss = Total contribution - Fixed costs

However, do not use this method if you are not comfortable with it. Stick to what you know best which is most likely the regular formula.