The break-even graph
A Break-even is the point at which revenue and total costs are the same, meaning the business is making neither a profit nor a loss. graph shows a break-even point (BEP) visually. A break-even graph shows the revenue, costs, number of products sold and BEP. An example is below:
The graph above demonstrates a break-even point (BEP) of 100 units.
Creating a break-even graph
Assume a firm has the following costs:
- fixed costs: £400
- selling price: £10 per unit
- variable costs: £6 per unit
To calculate the variable cost, multiply variable cost per unit by number of units. In this example, assume that the variable cost per unit is £6 and there are 200 units, so the variable cost is £1,200.
Construct a chart with output (units) on the horizontal (X) axis, and costs and revenue on the vertical (Y) axis. Onto this, plot a horizontal fixed costs line - it is horizontal because fixed costs don’t change with output.
Then plot a line to represent variable cost starting at the same point as the fixed costs line. Because the variable costs line is drawn above the fixed costs line, it becomes the total costs line. This is because the fixed cost added to the variable cost gives the total cost.
Now plot the revenue line. To do this, multiply sales price by number of units sold (output).
If the sales price is £10 and 200 items are planned to be sold, the calculation is:
£10 × 200 = £2,000 total revenue
Where the revenue line crosses the total cost line is the break-even point -costs and revenue are the same. Everything shown below this point is loss, and everything above it is profit.
