Break-even Charts (CIE IGCSE Business)

• Break-even analysis is a financial tool used to determine the number of units a business must sell to reach the point where the business revenue equals its expenses (no profit nor loss)
  • It helps businesses understand the minimum level of sales or output they need to achieve in order to cover all costs
  • This helps business managers to make informed decisions about pricing and production volumes
     
• The break-even point is the number of units that need to be sold for total costs to equal the sales revenue
  

Diagram with the Elements of a Break-even Analysis

Variable costs, fixed costs and sales revenue are all used in calculating the break-even point
 

• Fixed costs are costs that do not change regardless of the level of production or sales
  • E.g. rent, salaries and insurance
     
• Variable costs are costs that vary with the level of production or sales
  • E.g. raw materials, direct labour costs, packaging and shipping costs
     
• Sales revenue is the money gained from selling products/service and is calculated as follows
  • Sales revenue = number of items sold x selling price

• Break-even charts are graphs which show how costs and revenues of a business change with sales
  • It identifies the number of units a business must sell in order to break-even
    
    
• In order to construct a break-even chart the business needs to know the estimated fixed costs, variable costs and sales revenue

Break-even Table of Costs and Revenue for Tee-Crazy Ltd

	Sales $ = 0 units	Sales $ = 500 units	Sales $ = 3000 units
Fixed Costs	8,800	8,800	8,800
Variable Costs	0	2,000	12,000
Total Costs	8,800	10,800	20,800
Total Revenue	0	5,000	30,000

 

• Tee Crazy Ltd has the following estimates
  •  Fixed costs are $8,800 per year
  • The variable costs of each t-shirt is $4
  • Each t-shirt is sold for a price of $10
  • The factory can produce a maximum output of 3000 t-shirts per year 

Diagram of how to Construct a Break-even Chart

Five steps to constructing the perfect break-even chart
 

• Production output below the break-even point results in the business making a loss
  • Production output above the break-even point results in a profit

• A break even chart is a visual representation of the break-even point and is used to identify several key metrics
  • The break-even point
  • The margin of safety
  • The expected profit or loss 
    

Diagram of a Break-even Chart

The break-even chart for A2B Limited shows that at 324 units the total revenue = the total costs
  

Diagram analysis 

• Fixed costs do not change as output increases
  • A2B's fixed costs are £8,000 and these do not change whether the business produces 0 units or 500 units
     
• 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 line slopes upwards because total variable 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 line will slope more steeply than the total costs and will cross the total costs line at some point
     
• The point at which the total costs and the revenue lines cross is the break even point
  • The break even level of output for A2B is 324 units
    
    
• The margin of safety can be identified as the difference on the x-axis between the actual level of output (in this case 450 units) and the break even point (300 units). The margin of safety is 150 units
  
  
• The profit made at a specific level of output can be identified as the space between the revenue and total costs lines
  • In this instance, the profit made at 450 units of output is £14,400 - £11,250 = £3,150