Business Financials
Part 1 of 3

Break-Even

The point at which a business makes neither a profit nor a loss. Total revenue exactly covers total costs.

Definition
Break-even is the level of output (units sold) at which total revenue equals total costs. Below it, you're making a loss. Above it, you're making a profit.

Fixed Costs

Stay the same regardless of how many units you produce. They exist even if you sell nothing.

  • 🏢 Rent
  • 💼 Insurance
  • 💡 Salaries
  • 💻 Software

Variable Costs

Change in direct proportion to output. If you make more, you spend more.

  • 📦 Raw materials
  • 🚚 Postage per unit
  • 🛒 Platform fees
  • 🔧 Piece-rate labour
Think of it this way: Imagine you pay £500/month for a market stall (fixed cost). Each bag of sweets costs you 20p to make (variable). You sell each bag for 60p. Break-even is the number of bags you must sell each month just to cover that £500 — before you make a single penny of profit.
Formula BREAK-EVEN (units) = FIXED COSTS ÷ CONTRIBUTION PER UNIT

Don't worry — contribution is explained on the next screen. We'll bring this formula to life then.

See It Visually

Adjust the inputs below and watch the break-even point move on the chart in real time.

Break-Even
200
units to break even
Contribution/unit
£5.00
Price minus variable cost
Break-Even Revenue
£1,600
total sales needed

Break-Even Chart

Total Revenue
Total Costs
Fixed Costs
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Part 2 of 3

Contribution

Every unit sold contributes something towards covering fixed costs — and eventually towards profit. That amount is called contribution.

Definition
Contribution per unit is the selling price minus the variable cost per unit. It tells you how much each sale contributes towards fixed costs and profit.
Formula CONTRIBUTION PER UNIT = SELLING PRICE − VARIABLE COST PER UNIT
Also: TOTAL CONTRIBUTION = CONTRIBUTION PER UNIT × UNITS SOLD
The bucket analogy: Imagine fixed costs are a bucket that must be filled before you see any profit. Each unit sold pours in a certain amount of water — that's contribution. Once the bucket overflows, the overflow is your profit.
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Key link to break-even

Now the formula makes complete sense: Break-Even = Fixed Costs ÷ Contribution per Unit. You're calculating how many "bucketfuls" of contribution you need to fill the fixed cost bucket.

Worked Example

Using the window shims business from last session: bags sell for £12.99, variable costs (product + packaging + postage + fees) = £10.85, fixed costs = £200/month.

1
Contribution per unit
£12.99 (price) − £10.85 (variable cost)
= £2.14
2
Break-even point
£200 (fixed costs) ÷ £2.14 (contribution)
= 94 units
3
What this means
Must sell 94 bags/month before making any profit
Every sale after 94 = profit

Contribution Calculator

Try your own numbers — type in any scenario.

Contribution/unit
£9.00
per sale
Total Contribution
£450
for all units sold
Contribution Margin
60%
% of price that contributes
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Part 3 of 3

Margin of
Safety

Once you know the break-even point, the margin of safety tells you how much cushion you have — how far sales could fall before you start making a loss.

Definition
The margin of safety is the difference between actual (or forecast) output and the break-even output. It shows how much sales could drop before the business starts losing money.
Formula MARGIN OF SAFETY = ACTUAL OUTPUT − BREAK-EVEN OUTPUT
Also as %: MOS % = (MARGIN OF SAFETY ÷ ACTUAL OUTPUT) × 100
The cliff edge analogy: Imagine you're walking along a clifftop path. Break-even is the cliff edge. The margin of safety is how far back from the edge you're currently standing. The bigger the gap, the safer you are. A small margin of safety = dangerous territory.

All Three Concepts: Full Calculator

Enter the numbers below — all three results update together.

Contribution/unit
£8.00
selling price − VC
Break-Even
250
units needed
Margin of Safety
100
units above break-even
Profit / Loss
£800
at current output

Full Picture

Total Revenue
Total Costs
Fixed Costs
Margin of Safety
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Knowledge Check

Check Your
Knowledge

Five questions covering everything from today. No pressure — work through them at your own pace.

1. A business has fixed costs of £600/month, a selling price of £10 per unit, and variable costs of £4 per unit. What is the break-even point?
2. What does "contribution per unit" mean?
3. A business breaks even at 200 units and currently sells 320 units. What is the margin of safety?
4. If a business has a very small margin of safety, what does this mean for the business?
5. A product sells for £20, variable costs are £8 per unit, fixed costs are £3,600/month, and the business currently sells 400 units. What is the profit?

Exam Technique Tips

🎯
Always show your working. Even if your final answer is wrong, marks are awarded for correct method. Write out the formula, substitute the numbers, then calculate.
📐
Contribution first, always. In any break-even calculation, find contribution per unit first — it unlocks every other answer.
⚠️
Don't confuse profit and contribution. Contribution is not profit — it's what's left after variable costs, before fixed costs are deducted. Profit = Total Contribution − Fixed Costs.
💬
Interpret the numbers. For analysis marks, don't just give the number — explain what it means for the business. "A margin of safety of 50 units means sales could fall by 50 before a loss is made."
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