• 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.

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.

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.

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

Variable Costs (VC)

Variable costs move directly with output — produce more, pay more; produce nothing, pay nothing. Think of raw materials: a bakery buying flour only spends money on flour when it's actually baking bread.

• Examples: raw materials, direct production wages, packaging
• On a graph: starts at zero and rises steadily as output increases (though at very high output, bulk-buying discounts can mean it rises a little less steeply — an "economy of scale")

Total Costs (TC)

Because fixed costs are never zero for a real business, total costs can never be £0 either — even at zero output, you're still paying rent and insurance. That's an important exam point: total costs start above the x-axis on a chart, not at the origin.

Turning revenue into profit

Profit is simply the surplus left over once you've paid all the business's costs out of its revenue. If costs are bigger than revenue instead, the business has made a loss. Profit matters because it's the reward for the risk an entrepreneur or investor took, it helps a new business survive its early days, and it funds long-term growth for established ones.

There are really only three levers a business can pull to increase profit: increase revenue (sell more, or sell at a higher price), reduce costs, or do a combination of both. Every business decision — a new marketing campaign, switching suppliers, raising prices — ultimately traces back to pulling one of those three levers.

What is the break-even point?

The break-even point is the exact number of units a business needs to sell so that its revenue exactly equals its total costs. At that point, the business is neither making a profit nor a loss — it's just covering itself. Every unit sold before reaching that number contributes to paying off the fixed costs; every unit sold after it becomes pure profit (before tax).

Why does this matter to a business owner? Because it tells them the minimum amount they must sell just to survive, which directly shapes decisions about pricing (charge too little, and break-even becomes almost impossible to reach) and production planning (how many units is it even worth making?).

Contribution — the missing piece

To find the break-even point, you first need to know contribution — how much money each individual unit "contributes" toward covering fixed costs, once its own variable cost has been paid off.

The break-even formula

This makes total sense once you understand contribution: if fixed costs are £1,730 and each unit contributes £2.65 toward paying them off, you just need to know how many £2.65-sized "chunks" fit into £1,730. That's exactly what the division does.

Worked example — burger stall

Step 1 — Variable cost per burger = €2.10 + €0.20 = €2.30
Step 2 — Contribution = €4.95 − €2.30 = €2.65
Step 3 — Break-even = €1,730 ÷ €2.65 = 652.8 → round up to 653 burgers

Reading the chart

A break-even chart plots three lines against output (x-axis) and £ (y-axis):

• Fixed Costs — a flat horizontal line (never changes)
• Total Costs — starts at the fixed cost level and slopes upward (fixed + rising variable costs)
• Revenue — starts at £0 (at zero output) and slopes upward more steeply than total costs

The break-even point is simply where the Revenue line and Total Costs line cross. To the left of that crossing point, Total Costs sit above Revenue — that's the loss zone. To the right, Revenue sits above Total Costs — that's the profit zone.

Margin of Safety

This tells you how much "wiggle room" a business has — how far sales could fall before the business starts losing money. A bigger margin of safety means a business is in a more comfortable, lower-risk position.

Break-even isn't fixed forever — if the selling price, variable costs, or fixed costs change, the break-even point moves too. This is a favourite exam topic, so get the four rules locked in:

Break-even charts are a genuinely useful tool, but they rest on some assumptions that don't always hold true in the real world. Examiners love asking you to evaluate/criticise break-even analysis — here are the four main weaknesses:

1 Costs don't always rise in a straight line

Bulk-buying discounts can reduce variable costs per unit at high output, and fixed costs might suddenly jump if the business needs more staff or equipment to handle higher production — the real cost lines aren't perfectly straight.

2 Revenue doesn't always rise in a straight line

Big buyers often demand discounts for large orders, which lowers the average selling price per unit — so the revenue line can bend rather than stay perfectly straight.

3 Cost data is often just an estimate

When break-even charts are used to forecast the future, the cost figures used are predictions — and how accurate the whole chart is depends entirely on the skill and experience of whoever made those estimates.

4 Not all output gets sold

The model assumes every single unit produced is sold — but in reality, businesses hold some stock as a buffer for future demand, and unsold stock sometimes has to be sold off cheap just to clear space or raise cash.