Break-Even Analysis

    OCR
    GCSE

    Break-Even Analysis constitutes a critical quantitative tool within financial decision-making, determining the precise volume of output where Total Revenue equates to Total Costs. Candidates must demonstrate mastery of the interplay between fixed costs, variable costs, and selling price to calculate the break-even point and the resulting Margin of Safety. The study extends beyond mechanical calculation to the strategic evaluation of risk, the impact of price elasticity on revenue curves, and the limitations of the linear model in dynamic market environments.

    6
    Objectives
    4
    Exam Tips
    4
    Pitfalls
    3
    Key Terms
    5
    Mark Points

    Learning Objectives

    What you need to know and understand

    • Formula: Break-Even Point = Fixed Costs / Contribution per unit
    • Formula: Contribution = Selling Price - Variable Cost per unit
    • Formula: Margin of Safety = Actual Sales - Break-Even Sales
    • Graphical Rule: Total Revenue line must start at 0
    • Graphical Rule: Total Cost line must start at the Fixed Cost value
    • Limitation: The model assumes variable costs and selling price remain constant per unit

    Example Examiner Feedback

    Real feedback patterns examiners use when marking

    • "You calculated the break-even point correctly; now explain the implication of this figure for the business's survival"
    • "Your chart is accurate, but you failed to label the axes, which limits your communication marks"
    • "You identified the Margin of Safety; to improve, analyse what a reduction in this margin means for risk management"
    • "Evaluation requires questioning the data—is it realistic to assume the selling price will not change?"

    Marking Points

    Key points examiners look for in your answers

    • Award marks for correct application of the formula: Fixed Costs / (Selling Price - Variable Cost per unit)
    • Credit accurate plotting of the Total Revenue line starting from the origin (0,0) and Total Cost line starting from Fixed Costs
    • Identify the Break-Even Point (BEP) specifically where Total Revenue intersects Total Costs
    • Analyse the impact of changing variables (e.g., increased rent or lower material costs) on the BEP and profit
    • Evaluate the limitations of the model, specifically the assumption that all output produced is sold

    Examiner Tips

    Expert advice for maximising your marks

    • 💡Always write the formula before substituting figures; method marks are available even if the final calculation is incorrect
    • 💡When drawing charts, use a ruler and ensure axes are labelled with specific units (e.g., 'Output in units', 'Revenue/Costs in £')
    • 💡In 'Evaluate' questions, calculate the new BEP if data changes to support your argument with quantitative evidence
    • 💡Remember that the Margin of Safety indicates risk; a low margin implies high vulnerability to sales fluctuations

    Common Mistakes

    Pitfalls to avoid in your exam answers

    • Confusing Variable Cost per unit with Total Variable Costs in the denominator of the formula
    • Starting the Total Cost line from zero rather than the Fixed Cost value on the Y-axis
    • Defining the Margin of Safety as the break-even point itself, rather than the difference between actual sales and break-even output
    • Drawing curved lines for revenue or costs (assuming economies of scale) when the model assumes linearity

    Study Guide Available

    Comprehensive revision notes & examples

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    Key Terminology

    Essential terms to know

    Likely Command Words

    How questions on this topic are typically asked

    Calculate
    Explain
    Analyse
    Evaluate
    Recommend
    Discuss

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