5.

5 Break-
Even
Analysis
IB Guide Connections

2
 1

Contribution per
unit vs total
contribution
What are the differences?
Review!

One person is going to define and give

examples of variable costs and profit for 45
seconds. Once the first person is done, the
second person will talk about fixed costs and
revenue. Then we will review the concepts as
a class because we will be using it on the next
slides.

4
 Start your own pizzeria
You have decided to open a pizzeria in your free time. Fill out the
information on the following slide.

1. On the left-hand side, write down variable costs to make a pizza margerita
and estimate how much each one costs PER PIZZA
2. Then write the price you will charge for each pizza and how many you plan
to produce per month.
3. On the right-hand side, write down at least FOUR fixed costs and their cost
per month. Write down the total fixed costs at the bottom of the box.
**We will be using these to calculate for the next couple of slides.
5
Variable Costs: Price = Fixed Costs:

How many will you sell per month?

6
Variable Costs: Price = $12 Fixed Costs:

Flour: 0.10
Rent: $500
Marketing: $100
Salaries: $1000
Insurance: $100
Cheese: 1.00

Total fixed costs:

$1700
Basil: 0.50

How many will you

Tomato sauce: 0.70 sell per month?
2000 7
Introduction to break-even
To be able to calculate break-even, we need to calculate
contribution.

We use contribution for a few calculations:

Contribution per unit

Total contribution
Profit or loss
Break-even

8
Key
Word
Contribution per unit
Contribution per unit is the amount of money left over from the
sale of a product after the variable costs have been deducted.
Another way to say this is the amount that each product
contributes to paying off the fixed costs of the business.

Formula:
Price per – variable cost This is expressed in
unit per unit currency $, €, etc.

Now, calculate the contribution per unit for your pizza. 9

 Price = $12 Fixed costs:
Rent: $500
Marketing: $100
Salaries: $1000
Insurance: $100

For each pizza I

make, $9.70
goes to help
cover the fixed
Variable costs: costs.
Flour: 0.10
Cheese: $1
Basil: 0.50 Price = $12
Tomato sauce: 0.70 Total variable costs = $2.30
Total variable costs = $2.30 CPU = 12 - 2.30 = 9.70 10
Key
Word
Total contribution
Total contribution is the amount that all products or services
contribute to paying off the fixed costs of the business.

Formula:
This is expressed in
Contribution per unit x quantity
currency $, €, etc.

Now, calculate the total contribution for your pizza restaurant.

In my example, 9.70 x 2000 = $19,400 11

Key Profit or loss with
Word contribution
Profit or loss can be calculated using total contribution. Since we
know that variable costs are covered with contribution per unit,
the business just needs to pay off the fixed costs to make a profit.

Formula:
This is expressed in
Total contribution – fixed costs
currency $, €, etc.

Now, calculate the profit or loss for your pizza restaurant.

In my example, $19,400 – 1,700 = $17,700 12

 2

Break-even
Break-even charts and other
calculations
Key
Word Break-even
Break-even is the point at which a business is neither making a
profit or a loss.

Total Revenue Total Costs

(money from sales) (All costs associated with
(Price x Quantity sold) making the product)

Calculating the break-even point allows a business to know how

many units they have to sell in order to be profitable.

15
Break-even calculation
Formula:
Fixed costs This is expressed units.
Contribution per unit

What is another way to write Fixed costs

this portion of the formula? Price – variable cost per unit

Now, calculate the break-even for your pizza restaurant.

In my example, 1700/9.70 = 175.25 pizzas => 176 pizzas 16

Let’s practice

Matthew has a tropical fish business. His fixed costs are

£4800 and his variable costs are £180 and his selling price
is £300.

How many units does he have to sell to break even?

40 Units 17
 Let’s practice
Smarty Electronics have just opened on the local high
street. Their fixed costs are £81,000 which includes
the premises rent.

Smarty Electronics sell the latest cameras for £550

and their variable costs are £50.

How many units does the business have to sell to

break even?

162 Units 18
Let’s practice
The Sofa Store have just released sleeper sofa in the UK. They sell
the sleeper sofa for £1000. Their variable costs are £630 and their
fixed costs amount to £10000.

How many units does the business have to sell to break even?

But this problem is a bit different than the previous two. What do
we do with the answer?

28 Units
19
 Caution
When calculating break-even, it is important that you
always round the answer up when the answer is a
decimal. Can a business sell 345.68 candles? No, they
can’t. So to break-even, they need to sell 346 candles.

But if they sell 346 won’t they technically be making a

profit? While that is true, the IB require you to round
up, because at 345 candles, they are still making a loss.

On an exam, it is good to show both answers,

while circling the rounded number.

20
Charting break-even
Now that you know how to calculate break-even, it is
important to show it graphically. This can show you
many different things and can be modified to show
changes in price, costs, etc.

21
 Let’s practice…
On the exam, they might want to see the formula you used to
find break even. However, it is more likely for them to ask you
to construct a break-even chart/graph.

Sandy’s Subs has fixed costs of £5000

and each sandwich sells for £3.50 but
costs £1.50 to make.

To answer this question, there are

two steps.
1. Make a table with data
2. Chart the data 22
How to make a table
1. Draw the table with 6 columns (quantity, total variable cost*, fixed costs,
total costs, total revenue, profit/loss*)
2. Calculate break-even so that you know the numbers to put in the table.
Should it go by 10s, 100s, 1000s, etc.? There should be a few numbers
below break-even and a few above. Remember to use numbers ending
in 0 or 5 so that it is easier to chart. The exact break-even number
doesn’t need to be on the table. Always start with 0 for quantity!
3. Fill out the table from left to right.
4. When calculating profit and loss, demonstrate a loss by two parentheses
around the number ex: (6000)

*Variable costs are not required on the chart, but it helps calculate total
costs. Profit and loss is also not required, but it helps show if the calculations
for the break-even point are accurate. I recommend calculating profit and
loss for practice, but not in an exam. 23
Using a table

Number of Variable Fixed Costs Total Costs Revenue Profit/Loss

Items Sold Costs
0 0 5000 5000 0 (5000)
1000 1500 5000 6500 3500 (3000)
2000 3000 5000 8000 7000 (1000)
3000 4500 5000 9500 10500 1000
4000 6000 5000 11000 14000 3000
5000 7500 5000 12500 17500 5000

Sandy’s Subs has fixed costs of $5000 and each sandwich sells for $3.50
but costs $1.50 to make. 24
Steps for making a chart
1. Use the break-even formula to find the break-even point so you know what
spacing you will need for your chart and make a table to help you with
graphing the points (use the table just created)
• Choose values that are whole numbers and are evenly spaced for the x
and y axis. For example, every two spaces equals 100 is a good scale. If
you do every three spaces equals 100, then it is harder to have an exact
graph because each line is 33 instead of 50.
• The scale needs to be the same throughout the axis. If two spaces equal
100, then it needs to do that the whole time. HOWEVER, the same scale
does not need to be present on the x and y axis. Those can be different.

2. Draw and label your x and y axes (You only need to draw the top right
quadrant of the axis. It should be L shaped.)
• The x-axis is always for quantity
• The y-axis is always for costs/revenues

3. Label your chart at the TOP- Break-even for XYZ Business

25
Steps for making a chart
4. Plot the points from your chart for fixed costs. Connect the
dots in a STRAIGHT LINE and label the line (FC)
5. Plot the points for total costs, connect the dots in a STRAIGHT
LINE and label the line (TC)
6. Plot the points for total revenue, connect the dots in a
STRAIGHT LINE and label the line (TR)
7. With a dotted line, connect the break-even point to both the x
and y axis. Label this break-even point.

26
Charting break-even: Steps 1-3
Title of the
chart
Sandy’s Subs Break-even Chart
20000

15000
Revenue/cost

10000

5000

0
1000 2000 3000 4000
X and Y axis Sales (sandwiches)
labeled and
evenly spaced 27
Charting break-even: Step 4

Variable costs*

VC *Not required
on the exam
FC

Fixed costs: this

line is always
horizontal
28
 Charting break-even: Steps 5-6

TR

Total costs
must always TC
start at the
value for
fixed costs. VC
FC

Total revenue must

always start a 0. No
sales = no revenue 29
 Charting break-even: Step 7

TR
Break-
even point TC

VC

FC

Remember to
draw a dotted Remember to
line to show the draw a dotted
break-even point line to show the
30
break-even point
 Let’s practice
With the following information, make a break-even table and a break-even chart
and label everything correctly. Use the paper provided if you don’t have grid
paper available.

Samantha and Jacqui are planning to make necklaces to sell in school.

They want to know how many they will have to sell to break even.

Information:
• Their fixed costs will be £300
• Their variable costs are £3 per necklace
• They are going to produce 40 necklaces
• The selling price of a necklace will be £9

You are their business advisor. Would you recommend that they undertake this
business or not? 31
ANSWER
1. Calculate break-even 300 = 50 necklaces
9-3
2. Make a table for the points to graph. For my scale, I chose by
20 so that I could plot 4 points and one was above break-even.

Quantity Fixed costs Variable Total costs Revenue

costs
0 300 0 300 0

20 300 60 360 180

40 300 120 420 360

60 300 180 480 540

32
ANSWER

Break-even
point TR
As a business advisor, no,
TC this business does not
make sense. The break-
even point is 50
FC necklaces, but they only
plan on making 40 of
VC
them. This means that
they will not break-even
making them lose money
on this venture.

33
Exam Spotlight
Below, you will see how a break-even problem is
marked. Make sure you meet all of the
requirements for full marks.

Award [1] for correct labelling of both x and y

axis − total costs and revenue (y) and output or
units produced (x).
Award [1] for accurate total cost curve.
Award [1] for accurate total revenue curve.
Award [1] for identifying the break-even point =
Do Not reward calculations of BE quantity when
not accompanied by chart.
34
Change:
The modification of a
Key
business, its
products, service or
Concepts
goals over time due
to internal or
external factors Many businesses struggle to break-even
in their first years

Can you think of TWO examples of

different changes businesses could make
to help them break-even? What causes
businesses to not break-even in the first
few months or years?
Key
Word Margin of safety
The measure of the difference between the breakeven point and
the actual sales a business makes. It allows a business to know
how much its sales can drop before it is making a loss.

Formula:
This is expressed in
Actual sales – break-even point
units
For example if a businesses break-even point 650 tables and they sold 1200
tables then the margin of safety would be?

Margin of safety = 1200 – 650 = 550 tables. This mean if sales drop by 550
units the business is still breaking even. 36
Let’s practice
Ahmed is planning to open a new seafood restaurant in a popular
area to compete with his good friend Tariq. His business plan
makes the following assumptions:
Average selling price per meal: £40
Average variable cost per meal: £10
Monthly fixed costs: £9,300

Let's calculate the following:

1. Break-even point
2. The margin of safety assuming that Ahmed sells 1,200 meals
per month
3. What would happen to break-even output if the average
selling price per meal decreased to £30? Do the calculation
and comment on the effect to break-even. 37
ANSWERS
1. 9300 = 310 meals
40-10

2. 1200 – 310 = 890 meals

3. 9300 = 465 meals

30-10
Break-even increases by 155 meals, but that is still way below the
margin of safety. Ahmed can lower the price to remain
competitive if he needs to and still break-even.

38
Key Profit or loss with costs and
Word revenue
Profit or loss can be calculated total costs and total revenue. We
know from break-even that once total revenue exceeds total
costs, the business is making a profit.

Formula:
This is expressed in
Total revenue – total costs
currency $, €, etc.

** Remember to use the correct formula on the exam. If they do not say
which formula to use, you can use either one, but sometimes, they will ask
for a specific formula needed to achieve full marks. 39
 Profit and loss graphically

The areas of profit

and loss can be
shown graphically.
Can you shade the
areas of profit and
loss? How do you
know?

Use the chart to

the right to show
your answer.

40
Profit and loss graphically

Loss is when the

total revenue line is
below the total cost
line.

Profit is when the

total revenue line is
above the total cost
line. See the next
slide for the actual
shading.

41
Profit and loss

42
Other calculations
Once we have calculated break-even, there are
other calculations we can do. These calculations are
DECISIONS that a business makes about the price it
wants to charge or the profit it wants to make. The
business changes variables within the business to
make these possible.

They include:
- Target profit output
- Break-even price
- Target profit price

43
Key
Word Target profit output
Once a business has decided how much profit it wants to
make, it can then calculate how many products it has to sell
to make this profit.

Formula:
This is expressed in
Fixed costs + target profit
units
Price per – variable cost
unit per unit

44
Let’s practice

Samantha and Jacqui are planning to make necklaces to sell in

school. They want to make £ 100 profit per person. How many
do they need to sell?

Information:
• Their fixed costs will be £300
• Their variable costs are £3 per necklace
• The selling price of a necklace will be £9

300+200 = 83.333 or 84 necklaces

9-3
45
Key
Word Break-even target price
Until this point, we have assumed that production was limitless. We
assumed that the business could produce any number to break-even,
but this is not the reality. Every business or factory has a maximum
capacity they can produce.

Formula:
Fixed costs + variable costs per unit This is expressed in
Production level currency $, €, etc.

46
Let’s practice

Your company is making bicycles and has fixed costs of $2500,

variable costs per bicycle is $50, and you have the capacity to
produce 200 bikes. What price do you need to charge to
break-even?

2500 + 50 = $62.50
200

47
Key
Word Target profit/price
Just like before, a business might want to make a certain amount of
money (TARGET PROFIT) when they know what their maximum
output is. This formula helps them calculate what to charge to make
their desired profit.

Formula:
Fixed costs + target profit + variable costs This is expressed in
Production level per unit currency $, €, etc.

48
Let’s practice

A company company is making swing sets for children and

has fixed costs of $2500, variable costs per swing set is
$350, and the maximum capacity of the workshop is 200.
The company would like to make $6500. What price do
they need to charge to make this happen?

(2500+6500) + 350 = $395

200

49
15
Minutes Activity
1. Using the worksheet from the resource pack,
go through each of the problems and do the
calculations.

2. When you are finished, check your answers

with someone sitting next to you.

50
Real-life
Business
Spotlight As of 2020, all of these businesses had
something in common: Airbnb, Pinterest, Uber,
Lyft, Lime, Slack, Snap, WeWork, etc.

Can you guess what it is?

None of these businesses could break-even! They are

very famous, but they are not profitable. Read this
article about why they are not profitable and do
research on what has happened to these businesses
in the years following the publication of the article.
 3

Changes in variables
How does break-even shift when
other changes are made?
Extended practice
Using the information in the chart, decide if the contribution per unit and
break-even increase, decreases or experiences no change.
Change Effect on Effects on Effect of margin Profit
Contribution break-even of safety if sales
per Unit output stay the same
Higher selling price Higher Lower Increase Depends on if sales fall
Lower selling price Lower Higher Decrease Depends on sales
Higher variable Lower Higher Decrease Decrease
cost per unit
Lower variable Higher Lower Increase Increase
cost per unit
Increase in fixed No change Higher Decrease Decrease
costs
Decrease in fixed No change Lower Increase Increase 53
costs
15
Minutes Activity
1. Using the worksheet from the resource pack,
go through each of the problems about
changing factors (price, cost, etc.) and show
the changes both mathematically and
graphically.

54
Grid Review Practice
Use this grid to quickly review ideas we have previous learned. Either write the answers in
your notebook or discuss them with a partner. If you can’t remember something, go back
to your notes and look up the answers. Add up your points and see how many you get!

Earlier this Earlier in the unit Previous unit Previous unit

chapter (Unit 5) (Unit 2) (Unit 4)

What is the Explain mass Explain paternalistic Explain penetration and

formula for production and leadership and its premium pricing.
break-even? its adv/dis. characteristics.
State the two Define Explain an adv/dis State two primary and
profit/loss outsourcing. of an employee two secondary method
formulas share ownership of research.
scheme
What is margin Explain batch Explain job State a benefit and a
of safety? production and enlargement. drawback of a zero
its adv/dis. intermediary channel.
1 point 2 points 3 points 3 points 55
 ANSWERS
Earlier this chapter Earlier this chapter Earlier in the unit Earlier in the unit
(Unit 5) (Unit 5)

What is the formula Fixed costs Explain mass A large amount of products
for break-even? Contribution per unit customization and its move through stages to finish
adv/dis. together. Adv: low unit costs
Dis: high set up costs
State the two 1. Total contribution – Define outsourcing. Outsourcing is having another
profit/loss formulas fixed costs business do a task previously
2. Total costs – total done outside of the business.
revenue
What is margin of It is the amount between Explain batch Batch production is making
safety? current sales and the production and its similar items together. Adv:
break-even point adv/dis. spot mistakes quickly dis:
lower worker motivation

56
 ANSWERS
Previous unit Previous unit Previous unit Previous unit
(Unit 2) (Unit 2) (Unit 4) (Unit 4)

Explain paternalistic It is when a leader Explain penetration and Penetration: starting low
leadership and its takes care of premium pricing. and increasing over time
characteristics. workers but does not Premium: charging a
allow participation in high price to signify
decision making quality
Explain an adv/dis of Adv: it involves State two primary and Primary: Focus group,
an employee share employees in the two secondary method interview survey
ownership scheme operations of the of research.
business Dis: does Secondary: media
work if shares are articles, academic
sold journals, market analyses
Explain job It is adding more State a benefit and a Adv: low cost and
enlargement. tasks to a person’s drawback of a zero maintains control
job to keep them intermediary channel. Dis: small reach
engaged 57
 4

Evaluation of break-
even
Analyzing the benefits and
drawbacks of break even
 Evaluation of Break-Even
Benefits Limitations
- It assumes that costs and
revenues are straight lines
- Easy to construct and interpret
which is not always realistic
- The equation provides precise
(economies of scale)
results
- Not all costs can be classified
- Comparisons are easy to make
as fixed or variable. It is
by changing one factor or
difficult to account for semi-
another ex-price, variable costs
variable costs
- Helps when making decisions
- It makes the assumption that
like buying new equipment,
all items are sold
which location to choose, or
- Costs and prices are estimates
which project to invest in
and might vary from the actual
data.
59
Case study
practice

61
 Striva Sofas
Table 1:

Striva Furniture produces sofas in all

price ranges and sizes. The sell in
over 50 different countries. Striva
have a max output capacity of 80
million sofas.

Table 1 shows forecasted sales

revenue and costs for 2023.

a. Using Table 1, calculate the contribution per unit (show all your working). [2]
b. Using Table 1, calculate the break-even level of output (no working required). [1]
c. If Striva produces 75 million cans in 2023, using Table 1, calculate the margin of safety (no
working required). [1]
d. If Striva produces 75 million cans in 2023, using Table 1, calculate the profit (show all your
62
working).
IB Guide Connections

65
References:
Textbooks references:

Lomine, L., Muchena, M., & Pierce, R. A. (2022). Oxford IB

Diploma Programme: Business Management Course Book
(1st ed.). Oxford University Press.

Surridge, M., & Gillespie, A. (2022). Business Management

for the IB Diploma. Hodder Education.

66