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3.3 Break-even analysis

3.3 Break-even analysis

Learning outcomes

Break-even analysis is a commonly used business management tool used by start-ups and firms deciding on whether to invest in certain projects or products. It is used to determine the level of sales needed in order to cover all the costs associated with the output of a particular good or service.

This topic is commonly examined, especially in the Standard Level examinations (Paper 1 and Paper 2). It is an area that many students struggle with, so make sure students have plenty of opportunities to practise:

  1. break-even calculations
  2. constructing break-even charts
  3. explaining the purpose and limitations of break-even analysis in the context of different businesses.

    The learning outcomes (or assessment objectives) for this section of the IB Business Management syllabus are:

    • Total contribution versus contribution per unit (AO2)
    • A break-even chart and the following aspects of break-even analysis (AO2, AO4):
      •  break-even quantity/point
      •  profit or loss
      •  margin of safety
      •  target profit output
      •  target profit
      •  target price
    • The effects of changes in price or cost on the break-even quantity, profit and margin of safety, using graphical and quantitative methods (AO2, AO4)
    • The benefits and limitations of break-even analysis (AO3).
    Why is break-even analysis important?
    The LEGO Movie (some awesome facts!)
    • $60m production costs
    • 100 minutes movie
    • $69m box office sales in the USA, on first weekend!
    • $468.1m global box office revenues
    • 680% return on investment

     

    Not so awesome…

    The 13th Warrior

    • $160m production budget
    • Originally budgeted at $85m
    • 103 minutes production
    • $61.7m worldwide box office sales
    • One of Hollywood’s biggest movie flops!

    InThinking Business Management resources

    Click the hyperlinks below to access the InThinking resources for this particular section of the IB Business Management syllabus.

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