- The elements can be identified in the break-even chart below
- The selling price is £32 per unit
- Variable costs are £7.60 per unit
- Fixed costs are £8,000
Diagram: Break-even Chart with Key Elements
The break-even chart shows the break-even point, profit at a given level of output and the margin of safety
Diagram analysis
- Fixed costs do not change as output increases
- Fixed costs are £8,000 and these do not change whether the business produces 0 units or 500 units
- It is therefore represented by a horizontal line at £8,000 for all levels of output
- Total costs are made up of fixed and variable costs
Fixed, Variable and Total Costs at Different Levels of Output
Units |
0 |
100 |
200 |
300 |
400 |
500 |
Variable costs (£)
|
0
|
760 |
1,520 |
2,280 |
3,040 |
3,800 |
Fixed costs (£)
|
8,000 |
8,000 |
8,000 |
8,000 |
8,000 |
8,000 |
Total costs (£)
|
8,000 |
8,760 |
9,520 |
10,280 |
11,040 |
11,800 |
-
- At 0 units of output, total costs are made up exclusively of fixed costs
- At 500 units, the total costs are £11,800
-
- In the chart, the total costs line slopes upwards because total variable costs increase as output increases
- Revenue is the quantity sold x selling price
Revenue at Different Levels of Output
Units |
0 |
100 |
200 |
300 |
400 |
500 |
Revenue (£)
|
0 |
3,200 |
6,400 |
9,600 |
12,800 |
16,000 |
- The revenue line also slopes upwards
- At 0 units of output, the revenue is £0
- At 500 units the total revenue equates to £16,000
- Revenue increases with output
- The line will slope more steeply than the total costs and will cross the total costs line at some point
- The point at which the total costs and the revenue lines cross is the break-even point
- The break-even level of output is 328 units
- The margin of safety can be identified as the difference on the x-axis between the actual level of output (in this case, 450 units) and the break-even point
- The margin of safety is 450 - 328 = 122 units
- The profit made at a specific level of output can be identified as the space between the revenue and total costs lines
- In this instance, the profit made at 450 units of output is £14,400 - £11,420 = £2,980