Grade 12 · Accounting
Break-even analysis
Use fixed costs and contribution per unit to calculate a manufacturing business’s break-even quantity.
Classify the costs
Total fixed costs stay unchanged within the relevant activity range. Variable costs change with output. Contribution per unit is selling price per unit minus variable cost per unit.
Interpret break-even
At break-even, total revenue equals total costs. If required units are not a whole number, round up because a fraction of a unit cannot cover the remaining cost.
Formula sheet
- Contribution per unit = selling price - variable cost per unit
- Break-even units = total fixed costs / contribution per unit
Worked example
Fixed costs are R120 000. Selling price is R80 and variable cost is R50 per unit. Calculate break-even units.
- Contribution per unit = R80 - R50 = R30.
- Break-even quantity = R120 000 / R30.
- The business must sell 4 000 units to break even.
Try it yourself
1. What happens to break-even quantity when fixed costs rise and contribution stays unchanged? Check answer
The break-even quantity rises.
2. Fixed costs R10 000; contribution R30 per unit. How many whole units are needed? Check answer
10 000 / 30 = 333.33…; round up to 334 units.
Common mistake: Do not use selling price alone as the denominator. Use contribution per unit.