Tricky Topics Deciphered: Break-even analysis

Our AAT study guide dives into the tricky topic of break-even analysis within decision making techniques, for our Level 3 and 4 AAT students.

When a business breaks even, there is neither profit not loss. So it’s not an ideal scenario, but it’s better than a major loss.

We use break-even analysis to work out how many of each product we must sell in order to:

• cover the variable cost of producing it
• and contribute towards the fixed costs of the business.

When enough units have been sold to cover all of the fixed costs within the business, the product has ‘broken even’.

Until the break even point is reached, the business is not making any profit, so it’s an important analysis to run in order to see where you stand. We can manipulate the break-even equation then to predict potential profits if the variable cost of the product is adjusted.

Run through an in-depth example with our study guide below.

Read more on decision making techniques:

• Back to basics with Break-even analysis – Part 1
• Advanced aspects of short-term decision making
• Tricky Topics Deciphered: Suspense accounts

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Cath Littler is an accountancy learning specialist working with AAT and Mindful Education. .