A Level Business Studies: Break-Even Analysis – When Profit Starts to Grow

Every business wants to know the same thing: when will it start making a profit?
Break-even analysis helps answer that question by showing the exact point where revenue equals costs. Beyond this point, profit begins to grow, and understanding how to calculate and interpret it is a crucial skill in A-Level Business Studies.

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The Concept

The break-even point is where:

$$\text{Total Revenue} = \text{Total Costs}$$

Below this level of output, a business makes a loss. Above it, it starts to earn profit.

To find the break-even quantity:

$$\text{Break-even point (units)} = \frac{\text{Fixed Costs}}{\text{Selling Price per Unit – Variable Cost per Unit}}$$

For example, if fixed costs are £10,000, the selling price is £25, and the variable cost per unit is £15:

$$\text{Break-even point} = \frac{10,000}{25 - 15} = 1,000 \text{ units}$$

At 1,000 units, the business covers all costs. Every sale beyond that adds to profit.

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The Break-Even Chart

A break-even chart shows three lines:

• Fixed Costs – horizontal line (costs that don’t change with output).

• Total Costs – fixed + variable costs, starting at the fixed cost level.

• Total Revenue – a straight line from zero, rising with sales volume.

The intersection of the Total Revenue and Total Cost lines marks the break-even point.
To the left is loss, to the right is profit.

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The Real-World Application

Businesses use break-even analysis to:

• Set sales targets and understand the minimum needed for success.

• Test the impact of price changes or cost increases.

• Plan new product launches or expansions.

• Assess risk — how far sales can fall before losses occur.

It’s not just about numbers but about understanding the margin of safety, which tells how much sales can drop before the business returns to break-even.

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Skills Highlight

• Calculating and interpreting break-even points

• Drawing and analysing break-even charts

• Applying theory to pricing and cost decisions

• Linking quantitative analysis to business strategy

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Why It Works in Teaching

Break-even analysis combines maths, economics, and decision-making in a clear, visual way. Students see how small changes in price or costs can transform profit, giving them a deeper understanding of real business behaviour.