Break-even Charts (AQA A Level Business): Revision Note

The structure of break-even charts

• A break-even chart is a visual representation of the break-even point

• It is used to identify the following:

  • Fixed costs, total costs and revenue over a range of output

  • The break-even point, where total costs are equal to revenue

  • The profit or loss made at each level of output

  • The margin of safety

An example break-even chart

• Fixed costs do not change as output increases

  • A2B's fixed costs are £8,000, and these do not change whether the business produces zero units or 500 units

• Total costs are made up of fixed and variable costs

  • At zero 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 zero units of output, the revenue is £0

  • At 500 units, the total revenue equates to £16,000

  • 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

• The profit made at a specific level of output can be identified as the space between the revenue and total cost lines

  • In this instance, the profit made at 450 units of output is £14,400 − £11,250 = £3,150

Illustrating changes on the break-even chart

• Changing any of the variables of break-even (selling price, variable cost per unit or total fixed costs) changes the break-even point and level of profit it can expect to achieve

Changes in variables and the break-even point

Increased selling price

• An increase in the selling price reduces the break-even point

• An increase in the selling price increases revenue at each level of output from R₁ to R₂

• The break-even point falls from BEP₁ to BEP₂

• Profit on each unit of output greater than the break-even point is increased

Decreased selling price

• A decrease in the selling price increases the break-even point

• A decrease in the selling price reduces revenue at each level of output from R₁ to R₂

• The break-even point rises from BEP₁ to BEP₂

• Profit on each unit of output greater than the break-even point is decreased

Increased variable costs

• An increase in variable costs increases the break-even point

• An increase in variable costs increases total costs at each level of output from TC₁ to TC₂

• The break-even point increases from BEP₁ to BEP₂

• Profit on each unit of output greater than the break-even point is decreased

Decreased variable costs

• A decrease in variable costs decreases the break-even point

• A decrease in variable costs decreases total costs at each level of output from TC₁ to TC₂

• The break-even point falls from BEP₁ to BEP₂

• Profit on each unit of output greater than the break-even point is increased

Increased fixed costs

• An increase in fixed costs increases the break-even point

• An increase in fixed costs increases total costs at each level of output from TC₁ to TC₂

• The break-even point increases from BEP₁ to BEP₂

• Profit on each unit of output greater than the break-even point is decreased

Decreased fixed costs

• A decrease in fixed costs decreases the break-even point

• A decrease in fixed costs reduces total costs at each level of output from TC₁ to TC₂

• The break-even point falls from BEP₁ to BEP₂

• Profit on each unit of output greater than the break-even point is increased