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Break-even charts, changes and limitations

Edexcel IAL Business · WBS12 Managing business activities

The starter lesson covered contribution, break-even output and the margin of safety. This lesson reads break-even charts, shows what happens when prices or costs change, and weighs up the technique.

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Reading a break-even chart

A break-even chart plots revenue and costs against output:

Fixed cost line: horizontal.
Total cost line: starts at the fixed cost on the vertical axis and slopes up by the variable cost per unit.
Total revenue line: starts at the origin and slopes up by the price.

Where total revenue crosses total cost is the break-even point: read down for break-even output, across for break-even revenue. To the right, the vertical gap between the lines is profit; to the left it is loss. The horizontal distance from break-even to actual output is the margin of safety.

Output	Fixed cost ($)	Total cost ($)	Total revenue ($)	Profit ($)
0	36,000	36,000	0	-36,000
1,500	36,000	54,000	30,000	-24,000
3,000	36,000	72,000	60,000	-12,000
4,500	36,000	90,000	90,000	0
6,000	36,000	108,000	120,000	12,000

Data for a chart: price $20, variable cost $12, fixed costs $36,000

Break-even formulas in full

Break-even output = fixed costs / contribution per unit.
At break-even, total revenue = total fixed costs + total variable costs.
Break-even revenue = break-even output x price.
Margin of safety (units) = actual output - break-even output; as a percentage of actual output = margin / actual output x 100.
Profit = total contribution - fixed costs = margin of safety x contribution per unit.
Output needed for a target profit = (fixed costs + target profit) / contribution per unit.

What changes do

Change	Effect on break-even output	On the chart
Price rises	Falls (contribution rises)	TR line steeper
Variable cost per unit rises	Rises (contribution falls)	TC line steeper
Fixed costs rise	Rises	FC and TC lines shift up
Sales volume rises	No change	Actual output further right: bigger margin of safety

Remember that a price rise may cut sales volume

Limitations of break-even analysis

Assumes all output is sold and no inventory is left over.
Assumes a single price; in reality discounts and bulk deals vary it.
Assumes costs are linear: in practice bulk buying lowers variable cost per unit and fixed costs step up when capacity is reached.
Works best for a single product; fixed costs are hard to split between products.
Only as accurate as the data; it is a static snapshot and says nothing about whether the sales level is realistic.

It is still a quick, cheap way to judge risk, test 'what if' scenarios and support a business plan.

Worked example

Price $20, variable cost $12, fixed costs $36,000, planned output 6,000. Find break-even revenue, the margin of safety as a % of output, and profit.

Contribution = 20 - 12 = $8; break-even = 36,000 / 8 = 4,500 units
Break-even revenue = 4,500 x 20 = $90,000
Margin of safety = 6,000 - 4,500 = 1,500 units = 25% of output
Profit = 1,500 x 8 = $12,000

Answer: Break-even revenue $90,000; margin of safety 25%; profit $12,000

Key idea: TR crosses TC at break-even. Break-even revenue = break-even output x price. Profit = margin of safety x contribution. Target output = (FC + target profit) / contribution. Assumes linear costs, one price, all output sold.

Check yourself

Fixed costs are $45,000, price $25 and variable cost $10 per unit. Calculate break-even revenue.
Show answer
$75000. Break-even = 45,000 / 15 = 3,000 units; revenue = 3,000 x 25 = $75,000.
Fixed costs are $45,000 and contribution is $15 per unit. How many units must be sold to make a profit of $30,000?
Show answer
5000 units. (45,000 + 30,000) / 15 = 5,000 units.
Break-even output is 3,000 units and actual output is 4,800 units. Calculate the margin of safety as a percentage of actual output.
Show answer
37.5 %. 1,800 / 4,800 x 100 = 37.5%.
Price $25, variable cost $10, fixed costs $45,000. The price rises to $28. Calculate the new break-even output.
Show answer
2500 units. New contribution = 18; 45,000 / 18 = 2,500 units.
Price $40, fixed costs $60,000. Variable cost rises from $25 to $28 per unit. By how many units does break-even output rise?
Show answer
1000 units. Old 60,000 / 15 = 4,000; new 60,000 / 12 = 5,000; rise of 1,000 units.
Margin of safety is 1,200 units and contribution is $9 per unit. Calculate profit.
Show answer
$10800. Every unit beyond break-even adds its contribution to profit: 1,200 x 9 = $10,800.
On a break-even chart, the total cost line starts
- at the origin
- at the break-even point
- at the margin of safety
- at the level of fixed costs on the vertical axis
Show answer
at the level of fixed costs on the vertical axis. At zero output, total cost = fixed costs.
Which is a limitation of break-even analysis?
- It cannot show the effect of a price change
- It ignores fixed costs
- It assumes every unit produced is sold at the same price
- It can only be drawn by an accountant
Show answer
It assumes every unit produced is sold at the same price. Real firms hold inventory and give discounts.

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Last updated 8 November 2026. Spotted a mistake? Tell us.