Break-Even Diagrams Overview

Introduction

• Breakeven diagrams can be challenging for many business students.
• This guide explains the information displayed and how to interpret it.

Axes

X-Axis

• Displays possible levels of output (units produced over time)
• Ranges from 0 units to maximum capacity (e.g., 5000 units)
• Common markers: 0, 1000, 2000, 3000, 4000, 5000 units

Y-Axis

• Displays costs and sales revenue at different output levels
• Shows costs at 0 to 5000 units
• Illustrates potential sales revenue

Key Lines on the Diagram

Fixed Costs (FC)

• Horizontal line because fixed costs do not change with output level
• Example: Fixed costs at 10,000 pounds (e.g., rent, insurance, salaries)
• Fixed costs are always 10,000 pounds whether 0 or 5000 units are produced

Total Costs (TC)

• Starts from fixed cost line and goes up diagonally
• Accounts for both fixed and variable costs
  • Variable costs: raw materials, transport, wages
  • Variable costs increase with higher output
• Total costs at 5000 units > total costs at 1000 units

Sales Revenue (SR)

• Starts from origin (0,0)
• Diagonal line indicating increased revenue with higher output
• Sales revenue = output level x selling price

Interpreting the Diagram

Break-Even Point (BEP)

• Intersection of total cost line and sales revenue line
• Indicates level of output where total costs = sales revenue
• Example: BEP at 2000 units

Margin of Safety

• Difference between actual sales and break-even sales
• Example: Producing 3000 units when BEP is 2000 units
• Margin of safety = 1000 units

Profit and Loss

• To right of BEP: profit (difference between sales revenue and total costs)
• To left of BEP: loss (difference between total costs and sales revenue)
• Example: Profit/loss at different levels of output can be determined by comparing SR and TC

Conclusion

• Breakeven diagrams illustrate margin of safety, profit, loss, and break-even levels of output.
• Common examination concept; important to master.
• For questions, comments, or further clarification, engage with the tutorial’s comment section.
• Best of luck with your revision and exams!