Business ยท WBS12 (Unit 2)

Break-even analysis

Break-even is the output where total revenue equals total cost, so the business makes neither profit nor loss.

Contribution

Contribution per unit = selling price - variable cost per unit. Each unit sold contributes this much towards fixed costs, then to profit.

Break-even output

Break-even output = fixed costs / contribution per unit.

Margin of safety

Margin of safety = actual (or planned) output - break-even output. It shows how far sales can fall before a loss is made.

Worked example

Fixed costs $12,000; price $10; variable cost $6. Find break-even output.

  1. Contribution = 10 - 6 = $4
  2. Break-even = 12,000 / 4

Answer: 3,000 units

Key idea: Contribution = price - variable cost per unit. Break-even = fixed costs / contribution. Margin of safety = output - break-even.

Check yourself

  1. Price $25, variable cost $15 per unit. Find contribution per unit.
    Show answer

    $10. 25 - 15 = $10.

  2. Fixed costs $40,000; contribution $8 per unit. Find break-even output.
    Show answer

    5000 units. 40,000 / 8 = 5,000 units.

  3. Output 7,000 units; break-even 5,000 units. Find the margin of safety.
    Show answer

    2000 units. 7,000 - 5,000 = 2,000 units.

  4. Output 7,000 units with contribution $8 and fixed costs $40,000. Find profit.
    Show answer

    $16000. Total contribution 56,000 - 40,000 = $16,000.

  5. If fixed costs rise and nothing else changes, break-even output
    • falls
    • stays the same
    • rises
    • becomes zero
    Show answer

    rises. More fixed costs to cover with the same contribution per unit.

Practise with instant feedback

Sources

Last updated 7 November 2026. Spotted a mistake? Email alevel@lifereadysociety.com.