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Break-even diagrams
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A break-even diagram shows revenue and costs at every level of output, so you can read off profit, loss and the break-even point.
Reading the diagram
Output goes along the bottom. Money (£) goes up the side.
The fixed costs line is flat. The total costs line starts at fixed costs and rises. The total revenue line starts at zero.
Break-even is where total revenue crosses total costs.
The fixed costs line is flat. The total costs line starts at fixed costs and rises. The total revenue line starts at zero.
Break-even is where total revenue crosses total costs.
Profit, loss and margin of safety
To the left of break-even, costs are above revenue: a loss.
To the right, revenue is above costs: a profit. The vertical gap between the lines is the size of the profit or loss.
Break-even revenue = break-even units × price.
To the right, revenue is above costs: a profit. The vertical gap between the lines is the size of the profit or loss.
Break-even revenue = break-even units × price.
What if things change?
Higher price: revenue line is steeper, break-even falls.
Higher fixed costs: total costs line moves up, break-even rises.
Higher variable costs: total costs line is steeper, break-even rises.
Limitations: it assumes all output is sold at one price and that costs stay the same, which is rarely true.
Higher fixed costs: total costs line moves up, break-even rises.
Higher variable costs: total costs line is steeper, break-even rises.
Limitations: it assumes all output is sold at one price and that costs stay the same, which is rarely true.
Using the table, what is the profit at 300 units?
- Revenue at 300 = £3000
- Costs at 300 = £2500
- 3000 − 2500
Answer: £500 profit
Break-even is where the revenue line crosses the total costs line. Left of it is loss, right is profit. Higher price lowers break-even; higher costs raise it. Diagrams assume constant prices and costs.
The interactive lesson includes the diagrams for this topic.
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