Costs & Break Even Analysis

Revise Costs & Break Even Analysis for Business (Edexcel) 4BS1 (O Level) — revision notes and instant AI marking.

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Edexcel IGCSE Business

Costs & Break-Even Analysis

The big idea: Every business has to sell a certain number of units before it stops losing money and starts making profit — break-even analysis is simply the maths that tells you exactly where that "safe zone" begins.

Quick Summary

Revenue = Quantity sold × Selling price — the total money coming in from sales.
Costs split into Fixed Costs (don't change with output) and Variable Costs (change directly with output). Add them together to get Total Costs.
Profit = Revenue − Total Costs. If costs are bigger than revenue, it's a loss instead.
Contribution = Selling price per unit − Variable cost per unit — this is the money each unit sold contributes toward paying off fixed costs.
Break-even point = Fixed Costs ÷ Contribution per unit — the exact number of units where profit = £0.
Break-even charts plot Fixed Costs, Total Costs, and Revenue against output — where the Revenue line crosses the Total Costs line is the break-even point.
Margin of safety = Actual output − Break-even output — how much sales could fall before the business starts losing money.
Break-even charts have limitations: they assume costs/revenue grow in a straight line, that all output is sold, and that cost data is accurate — none of which is always true in real life.

1. Revenue

What counts as revenue?

Revenue is the value of the units a business sells over a period of time — think of it as "how much money came through the till from selling stuff," before any costs are taken out. It is not the same as profit, and it should never be described loosely as "money earned," because a business can also earn money from things like savings interest — that's not revenue, it's a separate type of income.

Formula Revenue = Quantity Sold × Selling Price

Here's the intuition: if a bakery sells 200 loaves at £3 each, its revenue for that batch is 200 × £3 = £600. Simple multiplication — but it's the foundation that every other calculation in this chapter builds on. Revenue generally rises as sales volume rises, which is exactly why it slopes upward on a break-even chart.

💡 Two-part revenue Sometimes a business sells the same product to two different customer groups at two different prices (like Fotherhill Organics selling compost to mail-order customers AND to gardening businesses). In that case, calculate revenue for each group separately, then add them together.

Practice Question

A juice bar sells 1,250 smoothies at £4.20 each in one month, plus 300 smoothie subscription boxes to a local gym at £18 each. Calculate total revenue for the month.

2. Fixed, Variable & Total Costs

Fixed Costs (FC)

Fixed costs are the costs a business has to pay no matter how much it produces — even if output is zero, or if it's producing 100,000 units, the fixed costs stay exactly the same. Picture a shop's monthly rent: the landlord doesn't care whether you sold one item or ten thousand, the rent bill is identical.

Examples: rent, management salaries, insurance, loan repayments
On a graph: a flat, horizontal line — because it never moves as output changes