Break-even Calculations | Business Studies for GCSE/IGCSE - Class 10 PDF Download

Calculating Break-even

• The break-even point can be determined using one of two methods:
• The first method calculates the number of units that must be sold to reach the break-even point.

• The second determines the point at which the company neither makes a profit nor incurs a loss.
  

The Margin of Safety

• The margin of safety represents the surplus of units sold beyond the break-even point.
• It offers valuable insights to a company regarding the number of sales it can decline before incurring a loss.
• The margin of safety can be computed with the formula:
  
• Companies aim for a sizable margin of safety to mitigate risks associated with fluctuating demand.

Using Break-even Analysis to Make Business Decisions

• Break-even analysis is a valuable tool for businesses when determining production levels and estimating profits.
• It plays a crucial role in communicating with stakeholders such as investors or lenders, influencing their decisions to invest in the business.
• Understanding when a business will break-even or the expected profit can significantly impact shareholder interest.
• Break-even analysis forms the foundation for well-informed decision-making processes within an organization.
• It aids businesses in evaluating costs and expected returns related to new projects and expansion strategies.
• By identifying the break-even point, businesses can evaluate risks and rewards associated with various decisions.

Examples of Using Break-even in Decision-making