Business

Study Notes

Calculating Breakeven Output - Formulae

Level:
AS
Board:
AQA, Edexcel, OCR, IB

Let's look at the most common way of calculating breakeven output - using formulae

Here is a table showing the sales, variable costs, fixed costs and profits from various levels of output for a one-product business:

The product is sold for £10 per unit. The variable cost per unit is £4. Fixed costs are £40,000 (the same at each level of output).

Let's use the same information as above to show how a formula can be used to quickly calculate the break-even output.

Remember contribution per unit? Here is a reminder of this crucial and really useful formula:

Contribution per unit = selling price per unit less variable cost per unit

In our example, contribution per unit = £10 less £4 = £6 per unit

Now apply the classic formula for calculating breakeven output:

Break-even output (units) = Fixed costs (£) / Contribution per unit (£)

So, break-even output = £40,000 divided by £6 = 6,666 units

Note: break-even output is always expressed in terms of units

So break-even output = 6,666 units

If the information is available, it is always quicker and easier to use this formula rather than use a table or draw a chart.

Revision Video: Contribution and Contribution per Unit

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