What happens to break-even output if a business cuts its selling price (and costs stay the same)?

It rises, because each unit contributes less to fixed costs

Which is a limitation of break-even analysis?

It assumes all output is sold at the same price

Break-even: calculations, changes and margin of safety

Break-even tells a business how many units it must sell to cover all its costs. You need to calculate it, show what happens when prices or costs change, and know its limits.

GCSE · 1BS0 · 1.3.2
International GCSE · 4BS1 · 3.3
About 18 minutes

Practise this lesson free (7 questions)

The formula

Break-even output = fixed costs ÷ (selling price per unit − variable cost per unit)
The bottom line, price − variable cost, is the amount each unit sold puts towards fixed costs (sometimes called contribution per unit).
Example: fixed costs £12 000, price £25, variable cost £10. Break-even = 12 000 ÷ (25 − 10) = 12 000 ÷ 15 = 800 units.
Break-even revenue = break-even output × price = 800 × £25 = £20 000.
If the answer is not a whole number, round up: selling fewer units would not quite cover the costs.

Margin of safety

Margin of safety = actual (or planned) output − break-even output
If the business sells 1100 units, its margin of safety is 1100 − 800 = 300 units. Sales could fall by 300 units before it makes a loss.
A large margin of safety means less risk.

What if things change?

But a higher price may also mean fewer customers buy.
Change	New break-even	Effect
Price rises to £28	12 000 ÷ (28 − 10) = 667 units (rounded up from 666.67)	Break-even falls: fewer sales needed
Variable cost rises to £13	12 000 ÷ (25 − 13) = 1000 units	Break-even rises
Fixed costs rise to £15 000	15 000 ÷ (25 − 10) = 1000 units	Break-even rises

Limitations

Break-even assumes every unit made is sold, at one price, and that variable cost per unit and fixed costs stay the same. In reality, prices change with discounts, costs rise, and bulk-buying can lower variable costs.
It is a forecast based on estimates, so it is only as reliable as the figures used. It also ignores demand: it says what must be sold, not what customers will buy.

Worked example

A café has fixed costs of £3000 a month. A meal sells for £9 and has variable costs of £4. Find the break-even output and the margin of safety if it sells 750 meals.

Break-even = 3000 ÷ (9 − 4) = 3000 ÷ 5 = 600 meals
Margin of safety = 750 − 600 = 150 meals

Answer: 600 meals; margin of safety 150 meals

Key idea

Break-even output = fixed costs ÷ (price − variable cost per unit). Break-even revenue = break-even output × price. Margin of safety = actual output − break-even output. A higher price lowers break-even; higher costs raise it.

Key words

Margin of safety: Margin of safety = actual or budgeted sales − break-even sales (in units, or in £ if both figures are in £).
Fixed costs: Costs that do not change with the level of output in the short run, such as rent and salaries.
Revenue: Revenue = price × quantity sold. Example: 400 items at £5 = £2,000.
Risk: The chance that something will go wrong, such as a business failing or losing money.
Variable costs: Costs that change directly with the level of output, such as raw materials.

All GCSE and International GCSE Business key terms and definitions →

Quick check

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Extra practice

2 more questions

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Fixed costs are £6000. Price is £25 and variable cost is £10 per unit. What is the break-even output?
Show the answer
Answer: 400 units
Contribution per unit = £25 − £10 = £15. Break-even = £6000 ÷ £15 = 400 units.
Fixed costs are £7000. Price is £9 and variable cost is £6. What is the break-even output, rounded up to a whole unit?
Show the answer
Answer: 2334 units
£7000 ÷ (£9 − £6) = £7000 ÷ £3 = 2333.33. Round UP to 2334 units, because a part unit does not cover the costs.

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Practise this lesson free (7 questions)All GCSE and International GCSE Business lessons

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Sources and references

Checked by the GCSE-ready editorial team, 17 October 2026. Last updated 2 October 2026. Spotted a mistake? Tell us and we will fix it.