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5.5 Break-even analysis

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  • Unit 5 - Operations Mgt/
  • 5.5 Break-even analysis

5.5 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 assessed in the external assessments, yet it is an area that many students struggle with. Therefore, make sure students have plenty of opportunities to practise the following:

  1. break-even calculations

  2. constructing break-even charts to scale

  3. explain the purpose and limitations of break-even analysis in the context of different businesses.

It is best that students try to practise the above under timed conditions in preparation for the external exams (Paper 2 in particular).

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)

  • Limitations of break-even analysis as a decision-making tool (AO3).

 Teacher only box

Note to teachers

There are two notable changes to this section of the new syllabus (first exams 2024):

  • Break-even analysis is now part of the operations management unit (Unit 5.5) whereas it was part of finance and accounts (Unit 3.3) in the previous guide (final exams N23).

  • The learning outcome "The benefits and limitations of break-even analysis (AO3)" in the former guide has been changed to "Limitations of break-even analysis as a decision-making tool (AO3)" in the new guide.

To add some context, consider the two case studies below to see why break-even is important for all organizations and business projects.

The LEGO Movie (some awesome facts!)

  • $60m production costs for a 100-minute animated movie

  • $69m box office sales in the USA, on first weekend!

  • Earnings of $468.1m in global box office revenues

  • 680% return on investment!

 

Not so awesome … The 13th Warrior

  • Originally budgeted at $85m

  • Actual production budget was $160m for the 103-minute movie

  • Earnings of just $61.7m in 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.

Return to the Unit 5.5 - Break-even analysis homepage

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