Figure 4 Break – even chart

Costs/ revenue (£ 000)

500

400 3 Revenue

350 5

250 4 Break – even point 2 Total costs

200

150 1 Fixed costs

100

50 6 7

0 10 20 30 40 50 60 70 80 90 100

Output (000s)

1. Fixed costs stay the same irrespective of output.

2. Total costs = total fixed costs + total variable costs. As we saw in Figure 3 the total variable cost curve passes through the origin. By introducing fixed costs we have added a constant to the equation which defines the curve. The total cost curve always cuts the vertical axis at the level of fixed costs.

3 The revenue line is found by multiplying the selling price of each unit by the level of output. In this instance the selling price is £4.

4 The point at which the revenue curve and the cost curve intersect is the break-even point.

5 To the right of the break-even point revenue is greater than total cost. The vertical difference between the two curves at any given point will give the total profit.

6 To the left of the break-even point a similar calculation to that described in 5 will give the total losses of the business at any given level of output.

7 If the business is operating at 70 per cent capacity it will still make a profit. The difference between the output at which a business is operating and the break-even output is known as the margin of error.

2.Comprehension check.

1. Reading from the information given in Figure 4, state whether or not the business will be making a profit or loss at each of the following levels of capacity: 20000, 35000, 55000, 70000, 90000.

2. What is the margin of error when output is 80000 units?