National 5BusinessSQABusiness ManagementRevision NotesManagement of FinanceBreak-EvenThe Break-Even Chart

The Break-Even Chart (SQA National 5 Business Management): Revision Note

Exam code: X810 75

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Updated on

Elements of break-even charts

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

    • Profit or loss made at each level of output

    • The margin of safety - the different between the actual and break-even level of output

A break-even chart

Graph showing monthly revenue, costs, and rentals of vans with break-even point, margin of safety, and profit indicator. Key: red=fixed, green=total costs, blue=revenue.
An example break-even chart shows that at 324 units, total revenue is equal to total costs  

Fixed costs

  • Fixed costs do not change as output increases

    • Fixed costs are £8,000 and these do not change whether the business produces 0 units or 500 units

    • The red line plots fixed costs

Total costs

  • 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 green line slopes upwards because total costs costs increase as output increases

Revenue

  • 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 blue line slopes more steeply than the total costs and will cross the total costs line at some point

Break-even point

  • The point at which the total costs (green) line and the revenue (blue) line cross is the break-even point

    • The break-even level of output is therefore 324 units

      • At this point, neither a profit nor a loss is made

    • If output is greater than the break-even point, a profit will be made

    • If output is less than the break-even point, a loss will be made

Margin of safety

  • The break-even chart also identifies the margin of safety if output is greater than the break-even point

    • It is the difference on the x-axis between the actual level of output and the break-even level

    • The margin of safety is calculated using the formula:

Margin space of space safety space equals space Actual space output space minus space Break minus even space output

  • In this instance, the margin of safety is therefore


    Margin space of space safety space equals space 450 space units space minus space 324 space units equals space 126 space units

Profit

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

    • Profit is calculated using the formula

Profit space equals space Revenue space minus space Total space costs

  • In this instance, the profit made at 450 units of output is therefore:

Profit space equals space £ 14 comma 400 space minus space £ 11 comma 250 equals space £ 3 comma 150

Interpreting a break-even chart

Worked Example

Here is the weekly break-even diagram for the Yorkshire Cheese Company. Output is shown as the volume of packs of cheese produced.

Graph showing weekly revenue and costs for the Yorkshire Rare Breed Sausage Company; fixed costs are red, total costs green, revenue blue.

The owner expects to produce 4,000 packs of cheese next week.

Use the break-even diagram to calculate:

a. The break-even point

b. The margin of safety if 4,000 packs of cheese are produced

b. The profit achieved if 4,000 packs of cheese are produced

(3)

Step 1: Identify the break-even point

  • The point at which the total costs line and the revenue costs line cross is 2,500 packs [1]

Step 2: Subtract the break-even point from the actual output level

Margin space of space safety space equals space 4 comma 000 space packs space minus space 2 comma 500 space packs equals space 1 comma 500 space packs [1]

Step 3: Identify revenue at 4,000 units of output

  • Revenue at 4,000 units of output is £40,000

Step 4: Identify total costs at 4,000 units of output

  • Total costs at 4,000 units of output is £34,000

Step 5: Calculate profit at 4,000 units of output

Profit space equals space £ 40 comma 000 space minus space £ 34 comma 000 equals space £ 6 comma 000 [1]

Examiner Tips and Tricks

A common misconception is that break-even shows profit - it doesn’t. It’s the point where total costs equal total revenue

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    Author
    Reviewer
    Lisa Eades

    Author: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

    Steve Vorster

    Reviewer: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.