Use break-even analysis for decisions and limits
Predict how price, fixed and variable costs shift break-even and explain model assumptions.
Cambridge IGCSE (9–1) Business 0774, 2027–2029 Version 2, Topic 4. Show working for calculations and state the assumptions behind production or cost decisions. Written practice is self-checked and does not certify exam readiness
Before you begin
- No previous operations study is assumed. Read the time period, output unit, cost data and operating constraints before calculating or recommending.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
If variable cost per unit rises while price and fixed costs stay the same, what happens to break-even output?
What you will learn
- Predict cost and price changes
- Use break-even for a simple decision
- Explain limitations of the model
Inputs change the calculation
With positive contribution, higher fixed costs raise break-even output; lower fixed costs reduce it. If price rises while variable cost per unit stays fixed, contribution rises and break-even output falls. If variable cost per unit rises while price is fixed, contribution falls and break-even output rises.
Use the updated figures, not a verbal rule alone. If contribution is zero or negative, the standard break-even formula does not produce a meaningful positive output.
The model simplifies operations
Break-even analysis assumes relevant selling price and variable cost per unit are constant, fixed costs stay fixed within the range, and units produced are sold. Real businesses can face changing prices, capacity limits, discounts, waste and uncertain demand.
The model supports comparison but is not a sales forecast or guarantee. Explain which assumption matters to the decision and use other evidence such as demand and capacity.
Pause and explain
What is one limitation of a simple break-even model?
Worked example
A product sells for $40, variable cost is $25 and fixed costs are $6,000. If fixed costs rise to $7,500, what happens to break-even output?
Show the worked solution
- Contribution remains 40 − 25 = $15.
- Old break-even: 6,000 ÷ 15 = 400.
- New break-even: 7,500 ÷ 15 = 500.
Answer Break-even output rises from 400 to 500 units because fixed costs increase while contribution stays $15 per unit.
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A product has fixed costs of $8,000, price of $32 and variable cost of $20. Calculate break-even. If variable cost rises to $24, calculate the new break-even, keeping other figures fixed.
Give me a hint
Recalculate contribution for each situation.
Compare my reasoning
- Original contribution: 32 − 20 = $12; break-even 8,000 ÷ 12 ≈ 666.67, so 667 whole units.
- New contribution: 32 − 24 = $8.
- New break-even: 8,000 ÷ 8 = 1,000 units.
Original break-even is 666.67 units, so 667 whole units are needed. With variable cost $24, contribution falls to $8 and break-even rises to 1,000 units.
Look for these in your work
- Both contributions correct
- Original rounded appropriately
- New output interpreted
A business wants to cut price from $25 to $22. Variable cost is $13 and fixed costs are $10,800. Calculate break-even output before and after, then state one demand question the calculation cannot answer.
Give me a hint
The lower price changes contribution; keep costs fixed for the calculation.
Compare my reasoning
- Original contribution: $12; break-even 10,800 ÷ 12 = 900.
- New contribution: $9; break-even 10,800 ÷ 9 = 1,200.
- The calculation does not predict whether demand rises enough to sell 1,200 units.
Break-even rises from 900 to 1,200 units. The calculation cannot show whether the lower price attracts enough extra demand to sell 1,200 units or whether profit improves.
Look for these in your work
- Old and new contribution correct
- Break-even values correct
- Demand limitation identified
A manager uses break-even output to decide whether to buy a larger machine. Name two assumptions or additional factors to check before deciding.
Give me a hint
A lower calculated threshold does not prove the machine will be used or paid for by sales.
Compare my reasoning
- Check whether price and variable cost remain stable at the planned scale.
- Check demand and capacity to sell the required output.
- Include the machine's financing, setup and maintenance effects on fixed costs.
The manager should check whether demand can support the extra output and whether prices and variable costs stay valid at that scale. The machine's purchase, finance, setup and maintenance may change fixed costs; the simple break-even result alone does not prove the investment is worthwhile.
Look for these in your work
- Assumptions challenged
- Demand considered
- Investment costs considered
Common mistakes
- Assuming a price rise always increases profit when demand may fall
- Ignoring sales capacity when break-even rises
- Treating the model as a demand forecast
What can you explain now?
If variable cost per unit rises while price and fixed costs stay the same, what happens to break-even output?
Compare with the explanation
It rises because contribution per unit falls
The business needs more units to cover fixed costs.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
How do changes in selling price, fixed costs and variable costs affect break-even output, and what can the model not predict?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.