Break-even

Question 1

Step 1: Axis

Answer 1

Draw your axes adding labels ‘Cost/sales’ on the vertical axis and ‘Output’ on the horizontal axis

Question 2

Step 2: Fixed Costs

Answer 2

Draw your fixed cost line
This stays the same regardless of output and is therefore a horizontal straight line

Question 3

Step 3: Variable Costs

Answer 3

Draw your variable cost line
Variable cost line slopes upwards from 0

This is because as output increases variable costs will increase

E.g. at 0 output variable costs will be £0

Question 4

Step 4: Total Cost Line

Answer 4

Draw your total cost line
It starts at the fixed cost point and slopes up upwards - it is parallel with the variable cost line

This is because total costs are fixed costs plus variable costs

Question 5

Step 5: Total Revenue Line

Answer 5

Draw your total revenue line
Slopes upwards from 0

This is because as sales increase total revenue will increase

E.g. if no units are sold total revenue will be £0

Question 6

Step 6: Break Even Point

Answer 6

Identify break even point
This is where the total cost line crosses the total revenue line

Draw a line downwards to the x axis

Read off the break-even level of output

Question 7

Break Even Level Of Output

Answer 7

This is where the business is making neither a profit nor a loss

If the business sells less than the break-even level of output it is making a loss

For every item sold above the break-even level it is making a profit

Question 8

Identifying Profit On The Chart

Answer 8

This is the space between costs and revenue above the break-even point

Question 8

Identifying Loss On The Chart

Answer 8

This is the space between costs and revenue below the break-even point

Question 9

Identifying The Break Even Point On The Chart

Answer 9

Where the total cost and revenue lines cross