so break even diagrams can be the absolute nemesis of many a level business students so in this video we're going to try and show you what kind of information displayed in braking diagram and how you interpret that information we'll start by checking out the axes and along the x axes on a breakeven diagram it will display the business's different possible levels of output from producing zero products per week or per month all the way to producing up to the business's maximum capacity and on this diagram that is 5000 units over a period of time and then we'll Demark some different variants along the x axes there to say well we might produce no units at all or it could be a thousand two three four thousand even five thousand units up the y axis it displays to us what the organization's costs might be if we do produce different levels of output so we can see what our cost might be if we don't produce any units at all what that costs might be if we produced 2,000 3,000 4,000 or 5,000 units and also the y axes allows us to see what the business's sales revenue might be at different levels of output as well so we can use these diagrams to see what will be our sales revenue if we produce no units at all all the way up to what our sales revenue will be if we reach our maximum capacity and sell 5,000 units now once we've looked at the axes we can see some of the different lines that we've got drawn on our diagram and these lines are crucial for allowing us to show key bits of information on a break-even chart so our first line is this blue one across here we've labeled it up FC and FC stands for fixed costs and you'll see that this line is horizontal and it's horizontal because no matter what our level of output is for this organization there are always some cost that have to be paid our fixed costs are ones that remain constant remain unchanged in the short term regardless of the fact that we might increase the number of units that we produce so on this diagram our fixed costs come in at 10,000 pounds as can be made up of things like rent and insurance and salaries and that means it doesn't matter whether we produce 0 products in a month or 5,000 products in a month our fixed costs are always going to come in at 10,000 pounds now because we've got to pay those fixed costs regardless even if we don't produce any products the next line we can show start at our fixed cost line and that's labeled up as PC which stands for total costs so this is where we take our fixed costs and then we also add on the fact that every time we produce a level of output we're going to have to pay some variable costs of production now if we don't produce any products at all we won't have to pay any variable costs things like raw materials or transport costs or wages but the more we increase our level of output the more variable costs we're going to have to pay the more we're going to have to pay for stock and raw materials and Wade isn't transportation so as we produce a greater level of output our variable costs and so therefore our total costs will go up so our total costs at 5,000 units are much higher than our total costs our 1,000 units but the key thing to remember is even if we produce zero units in a month doesn't mean our total costs are zero is that our variable costs of production will be nothing if we don't produce any products we're still always going to have to pay those fixed costs gotta pay the rent gotta pay the insurance got to pay those salaries so we will start from the fixed cost line and it will go diagonally upwards final line we have on our breakeven diagrams is labeled up as s R which stands for sales revenue that shows us the different levels of output how much revenue the business made the able to achieve so this time it does start in the far bottom left-hand corner the point of origin there and what that means is if we produce no products at all we've got nothing to sell so we won't make any sales revenue it doesn't matter how much we charge for our products we could charge a million pounds for a product if we wish we don't produce any and then we don't sell any as sales revenue will be zero where this line also raises diagonally which indicates the more units of output we produce the more products we will have to sell and so theoretically the more sales revenue we may be able to realize so our sales revenue at 5,000 units is much much higher than our sales revenue will be at 1,000 units and we can calculate that sales revenue by just taking different levels of output and multiplying it by our selling price so we would do 1,000 units times our selling price will tell us our sales revenue we leave 3,000 units multiplied by our selling price and it will tell us our sales revenue so that shows us the three different lines we'll see on a break-even diagram but here's the good bits here's what we can actually read or interpret from our diagrams so we know that breaking even means that a business hasn't made a profit it's not sold enough products to make a profit but it's not sold so few then it makes a loss either sold just enough to cover its costs so on this diagram we're breaking even where we are sold just enough products and achieved just enough sales revenue to equal or cover our total cost of production so where are these two lines intersect where they cross over where our sales revenue and our total cost line are at the same point where they intersect that shows us on our diagram what our break-even point is but what's more interesting is where we then read down onto the x-axis and see how many units that equals so what's known as our break-even level of output so on this diagram our two lines cross over our sales rep now total cost line intersect at this point here and those directly above two thousand units what that indicates to the entrepreneur to the managers of this organization is if we can hit two thousand units of production and we can sell all of those two thousand units we will have made just enough sales revenue to cover our total costs now we could work that out by just using the break-even formula but I break even diagrams can show us a couple of other tasty bits of information as well first of all our breakeven diagrams can also illustrate what's known as our margin of safety as well and your margin of safety is how many products you are actually selling above your break-even level of output so we might construct this diagram at the start of a month before program even before the the entrepreneur set the business up to establish one our breakeven level of output would be we can use it as a target to try an aim towards an in our first few months we know that we can hit sales of two thousand units we would break even but it might be that further down the line we're selling more than that we're producing on a greater scale that maybe we're producing three thousand units per month now if we produce three thousand units per month that is at of our breakeven level of output in fact it is one thousand units above our break-even level of output and that is what's known as our margin of safety margin of safety means how much your sales could fall by and you would still be at your break-even level of output so if we're producing three thousand units per month and assuming we're selling all those units we could reduce that level of output by one thousand units and we'd still be no worse off than falling back to our break-even level of output so the difference between those two points there is known as our margin of safety now if of course we were actually producing it to 4,000 units problems a margin of safety would be even greater this time it'd be 2,000 if we were working at full capacity in producing five thousand units per month and assuming that a break-even level of output remained unchanged at 2,000 units we'd have an even greater margin of safety there so you can see margin of safety zon breakeven diagrams could even be asked to mark them on their on the diagram so it allows us to interpret to read these diagrams to find out additional information the other thing we can see from a breakeven diagrams is the level of profit or loss that we might achieve at different levels of output now to do that what we need to do is to read the difference between our sales revenue line at a certain level of output and our total cost line at the same level of output so for example anything to the right of our breakeven point will show us how much profit a business might make at a given level of output for example at 3,000 units here the difference between our sales revenue here and our total cost here is how much profit we would realize and if we read across onto the y-axis and have a look at what the figures might be for sales revenue at 3,000 units and what it might be for total costs at 3,000 years it allows us just to see how much profit the business might achieve if it could get to that level of output we can do exactly the same for loss as well everything to the left of our break-even point here would be a loss if a business were to sell that number of units for example at 1,000 units here we haven't reached a break-even level of output yet we can calculate how much of a loss we would actually make so we'd have to read across to the y axes again we'd have a look at our sales revenue at 1,000 units and read across and we'll have a look at our total costs at 1,000 units and we read across and the difference between those two figures would tell us exactly in pounds how much of a loss week would accomplish so there's great ending chance for you can read a lot of information from them you can tell the margin of safety that an organization might achieve you can read profit you can read last you can see the break-even level of output on there it's a really common concept to come up in business a level examinations one you really should make sure that you've mastered good luck with it if you've got any questions about it throw it into the comments down below this tutorials use so give it a like share it with your classmates best of luck with your revision I know the exams are coming soon you know you can crack them just keep revising those key concepts we'll see it from the tutorial see