Revenue and costs - EduqasConstruct and interpret a break-even chart

A break-even 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. Choose a reasonable maximum cost and maximum sales shown on each axis, so the BEP is clearly visible. Onto this, plot a horizontal fixed costs line - it is horizontal because fixed costs do not change with output.

Then plot a line to represent variable cost starting at the same point as the fixed costs line on the left. 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. The revenue, is the price per unit sold multiplied by the number of units sold (output). First choose a reasonable maximum number of units possibly sold to calculate the maximum possible revenue.

For example, if the sales price is £10 and a maximum of 200 items are likely to be sold, the calculation is:

£10 × 200 = £2,000 total revenue

Use this as the right-hand point of the revenue line. The start of the revenue line is the origin point where the axes cross. To draw the revenue line, simply join these two points with a straight line.

Where the revenue line crosses the total cost line is the break-even point - costs and revenue are the same. Sales below this point represent a loss, and everything above it is profit.