Break-even charts and margin of safety

Overview

Break-even output and how to read it from a chart, the fixed cost, total cost and revenue lines, margin of safety, and the effect of changes in costs or price on break-even.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is break-even output?

   Model answer

   Break-even output is the level of output at which total revenue equals total costs. The business makes neither a profit nor a loss.

2. 2

   What does a break-even chart show?

   Model answer

   A break-even chart shows fixed costs, total costs and total revenue at different levels of output. The break-even point is where total revenue and total costs cross.

3. 3

   How is the fixed costs line shown on a break-even chart?

   Model answer

   The fixed costs line is horizontal because fixed costs stay the same at every level of output.

4. 4

   Where does the total costs line start on a break-even chart, and why?

   Model answer

   The total costs line starts at the level of fixed costs, not at zero. Fixed costs must be paid even when nothing is produced.

5. 5

   Where does the total revenue line start on a break-even chart?

   Model answer

   The total revenue line starts at zero, since no revenue is earned when nothing is sold. The line rises steadily as each unit sold adds its price to revenue.

6. 6

   How do you read the break-even level of output from a chart?

   Model answer

   Find the point where the total revenue and total costs lines cross. Read straight down from that point to the output axis.

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