Summary IB Business Management 3.3 - Break-even analysis

Business Management 3.3 – BREAK-EVEN ANALYSIS


BREAK-EVEN: level of output at which total costs = total revenue. No profit or loss is made

METHODS
1. Table method

Quantity sold Fixed costs Variable costs Total costs Revenue Profit / (loss)
(variable + (price x (revenue –
fixed) quantity) costs)
0 500 0 500 0 (500)
500 500 500 1000 1000 0


2. Graphical method




Variable cost starts in 0 and increases at
constant rate

Fixed costs is a horizontal line

Total cost with same gradient than variable
costs

Total costs and sales revenue line crosses = BE
Break-Even point

X: units of output and sales

Y: costs and sales revenues

Margin of safety: the amount by which the output level exceeds the break-even level of output.
How much sales could fall without the firm falling into loss

3. Break-even formula (more accurate)

Contribution per unit: selling price of a product - direct costs per unit. Amount each unit of
production contributes toward fixed costs and profit. Selling price ˃ Direct cost = contribution (no
profit because fixed costs not covered)

Total contribution: contribution for all units sold. Unit contribution x output. Total contribution ˃
Fixed costs = Profit



1