Break-even Analysis

This lesson covers break-even analysis in depth — a core quantitative technique in AQA A-Level Business topic 3.5.2. You will learn how to calculate break-even output, contribution per unit, total contribution, and margin of safety. You will also learn how to construct and interpret break-even charts and evaluate the usefulness of break-even analysis.

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What Is Break-even?

Key Definition: The break-even point is the level of output (or sales) at which total revenue equals total costs. At this point, the business makes neither a profit nor a loss.

At break-even: Total Revenue = Total Costs (and therefore Profit = £0).

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Contribution

Understanding contribution is essential before calculating break-even.

Key Definition: Contribution per unit is the selling price per unit minus the variable cost per unit. It represents the amount each unit sold contributes towards covering fixed costs and, once fixed costs are covered, towards profit.

Formula: Contribution per unit = Selling price per unit - Variable cost per unit

Formula: Total contribution = Contribution per unit x Number of units sold

Alternatively: Total contribution = Total revenue - Total variable costs

Worked Example: Contribution