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16: Costs, scale of production and break-even analysis
Simple break-even charts
KEY TERM Break-even describes a situation where a business is not making a profit or a loss
from the production and sale of its products. In other words, the revenue a business
Break-even: the level of output
earns from selling its output exactly equals the total costs of producing the output.
where revenue equals total costs; If the revenue a business earns from selling its output is greater than the total costs
the business is making neither
of producing it, then the business earns profit. However, if the revenue earned is
profit nor loss.
less than the total costs then the business will make a loss. These three situations
are shown in Figure 16.5.
Break‐even Profit Loss
Revenue Total Costs 223
Figure 16.5 Break-even, profit and loss
The concept of break-even
Break-even analysis is a business technique that shows the relationship between
revenue, costs and volume of output/sales. A business might use break-even
analysis to:
■ calculate how many units it needs to sell before it starts to make a profit
■ calculate the effect on profit of increasing or decreasing the price of a product
■ calculate the effect on profits of an increase or decrease in business costs.
Simple break-even charts
The purpose of a break-even chart is to show the relationship between a business’s
revenue and costs at different levels of output. The chart can be used to work
out the level of output that must be produced and sold to earn revenue which
exactly equals the total costs of producing that level of output. This is known as
the break-even output.
To produce a break-even chart, a business needs to know its:
■ revenue at zero output and at its maximum output (capacity)
■ total costs at zero output and at capacity output
■ fixed costs at zero output and at capacity output.
The revenue and cost information at these two output levels is then used to produce
a break-even chart similar to that shown in Figure 16.6.
