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How many units must a business sell before it starts to make a profit?

Break-even analysis: the concept of break-even, contribution, the calculation of break-even output, the margin of safety, interpreting a break-even chart, and the uses and limitations of break-even.

A focused answer to the WJEC GCSE Business content on break-even analysis, covering the concept of break-even, contribution, the break-even formula, the margin of safety, reading a break-even chart, and the uses and limits of break-even.

Generated by Claude Opus 4.813 min answer

Reviewed by: AI editorial process; not yet individually human-reviewed

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  1. What this dot point is asking
  2. The concept of break-even
  3. The margin of safety
  4. Reading a break-even chart
  5. Uses and limits of break-even
  6. Why this matters
  7. Try this

What this dot point is asking

WJEC wants you to understand the concept of break-even, the idea of contribution, how to calculate break-even output, the margin of safety, how to read a break-even chart, and the uses and limits of break-even analysis. It builds directly on revenue and costs, and it is one of the most reliable calculation questions on the paper, so the formula must be automatic.

The concept of break-even

The idea behind it is contribution. Each unit sold brings in its selling price but only costs its variable cost to make, so the difference, the contribution, goes towards paying off the fixed costs. Once the total contribution covers all the fixed costs, the business breaks even, and every unit after that adds its contribution straight to profit.

The margin of safety

A large margin of safety means the business has plenty of room before a fall in demand pushes it into a loss, which lowers risk. A small or negative margin means it is selling at or below break-even and is vulnerable, so the margin of safety is a quick way to judge how exposed a business is.

Reading a break-even chart

The total revenue and total cost lines cross at the break-even point: read straight down to the output axis for the break-even output. To the left of the crossing point the cost line is above the revenue line (a loss); to the right the revenue line is above (a profit).

Uses and limits of break-even

But it relies on assumptions that rarely hold exactly: that everything made is sold, that it is all sold at one price, and that costs rise in straight lines. In reality businesses offer discounts, costs change in steps, and not everything sells, so break-even is a useful guide, not an exact prediction.

Why this matters

Break-even ties revenue and costs to a clear decision: how much must we sell to be safe. It links to pricing in the marketing mix (changing the price changes the contribution and the break-even point), to sources of finance (lenders ask for the break-even figure), and to cash flow (selling above break-even feeds cash and profit). The calculation appears on almost every paper, so accuracy here is worth real marks.

Try this

Q1. Selling price is 30, variable cost is 18 per unit, fixed costs are 36,000. Calculate the break-even output. [2 marks]

  • Cue. Contribution: 30−18=1230 - 18 = 12; break-even: 36,00012=3,000\frac{36{,}000}{12} = 3{,}000 units.

Q2. A business breaks even at 3,000 units and sells 3,800. State its margin of safety. [1 mark]

  • Cue. 3,800−3,000=8003{,}800 - 3{,}000 = 800 units.

Exam-style practice questions

Practice questions written in the style of WJEC exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

WJEC (Unit 1)3 marksA business sells its product for 20. Its variable cost is 12 per unit and its fixed costs are 32,000. Calculate the break-even output. Show your working.
Show worked answer →

A 3-mark AO2 calculation. The contribution per unit is the selling price minus the variable cost per unit: 20−12=820 - 12 = 8. Break-even output is fixed costs divided by contribution per unit: 32,000÷8=4,00032{,}000 \div 8 = 4{,}000 units. Markers award marks for the correct contribution per unit, the correct method (fixed costs divided by contribution), and the answer of 4,000 units. A common error is to divide fixed costs by the selling price instead of by the contribution per unit.

WJEC (Unit 1)6 marksA business breaks even at 4,000 units and expects to sell 5,200 units. Calculate its margin of safety, then analyse why the margin of safety is useful to the business.
Show worked answer →

A 6-mark question split between AO2 calculation and AO3 analysis. The margin of safety is expected output minus break-even output: 5,200−4,000=1,2005{,}200 - 4{,}000 = 1{,}200 units. Analysis: the margin of safety of 1,200 units shows how far sales could fall before the business stops making a profit, so the larger it is the more cushion the business has against a drop in demand. For this business a 1,200-unit margin means sales could fall by just over a fifth (1,200 out of 5,200) and it would still avoid a loss, which gives the owner confidence and reduces the risk of a price or investment decision. Markers reward the correct margin of safety figure plus a developed chain explaining what it tells the business and why that matters.

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