Using Break-even (AQA GCSE Business)

The Structure of Break-even Charts

• A break even chart is a visual representation of the break even point and is used to identify the following:

  • Fixed costs, total costs and revenue over a range of output

  • The break even point - where total costs are equal to revenue

  • Profit or loss made at each level of output

  • The margin of safety

Diagram: A break-even chart

An example break-even chart shows that at 324 units, total revenue is equal to total costs  

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

  • The red line plots fixed costs

• Total costs are made up of fixed and variable costs

  • At 0 units of output, they are made up exclusively of fixed costs

  • At 500 units, the total variable costs equate to £11,800

  • This green line slopes upwards because total costs costs increase as output increases

• The revenue line also slopes upwards

  • At 0 units of output, the revenue is £0

  • At 500 units the total revenue equates to £11,800

  • Revenue will increase with the output

  • The blue line slopes more steeply than the total costs and will cross the total costs line at some point

• The point at which the total costs (green) line and the revenue (blue) line cross is the break-even point

  • The break even level of output is therefore 324 units

    • At this point, neither a profit nor a loss is made

  • If output is greater than the break-even point, a profit will be made

  • If output is less than the break even point, a loss will be made

• The break even chart also identifies the margin of safety if output is greater than the break even point

  • It is the difference on the x-axis between the actual level of output and the break-even level

  • The margin of safety is calculated using the formula:
    

    
    

  • In this instance, the margin of safety is therefore

    
    

• The profit made at a specific level of output can be identified as the space between the revenue and total costs lines

  • Profit is calculated using the formula

• In this instance, the profit made at 450 units of output is therefore: