EDEXCEL GCSE BUSINESS · PAPER 1
Exam Practice: Break-Even Analysis
Break-even analysis · Putting a business idea into practice · Lesson 3 of 5 · 10 marks · 25 minutes
Name Date
Answer all questions. Show your working in calculations.
Question 1 DEFINE [1 mark]
Define the term 'margin of safety'.
Question 2 CALCULATE [2 marks]
A business has fixed costs of £12,000. It sells its product for £20 and the variable cost is £8 per unit. Calculate the break-even level of output. You are advised to show your working.
Question 3 CALCULATE [2 marks]
The same business sells 1,300 units. Using your answer above, calculate its margin of safety. You are advised to show your working.
Question 4 OUTLINE [2 marks]
Outline one benefit to a new business of calculating its break-even output.
Question 5 EXPLAIN [3 marks]
Explain one impact on a business's break-even output of an increase in the variable cost per unit.
Answers
Check your answer only once you have written one.
Question 1 [1 mark]
The difference between a business's actual sales and its break-even level of output.
▸ Actual / budgeted sales minus break-even output 1 mark
Question 2 [2 marks]
£12,000 ÷ (£20 - £8) = £12,000 ÷ £12 = 1,000 units
▸ Correct method: fixed costs ÷ (price - variable cost per unit) 1 mark
▸ Correct answer: 1,000 units 1 mark (award 2 marks for the correct answer with no working)
Question 3 [2 marks]
1,300 - 1,000 = 300 units
▸ Correct method: actual sales - break-even output 1 mark
▸ Correct answer: 300 units 1 mark (own figure rule applies)
Question 4 [2 marks]
It shows the owner how many units they must sell to avoid a loss (1), so they can judge whether their sales target is realistic before spending money on the business (1).
▸ A benefit identified, e.g. sets a sales target / shows if the idea is viable / helps get a loan 1 mark
▸ Developed: why this helps the business 1 mark
Question 5 [3 marks]
The break-even output will rise (1). Each unit sold now contributes less towards paying the fixed costs, because the gap between price and variable cost is smaller (1). This means the business must sell more units before it covers its costs, and its margin of safety falls (1).
▸ An impact identified: break-even output rises 1 mark
▸ First linked point of explanation 1 mark
▸ Second linked point of explanation 1 mark