Business revenues, costs and profits
Break-even diagrams
A break-even diagram is a graph plotting a business's revenue and costs against the number of units it makes and sells. Money in pounds (both revenue and costs) goes on the vertical axis, and output or sales in units goes on the horizontal axis, showing where the business makes neither a profit nor a loss.
The lines on the diagram
Four lines are drawn, and each one behaves differently:
| Line | Where it starts | Shape |
|---|---|---|
| Total revenue | At the origin | Straight line rising with each sale |
| Fixed costs | At the fixed cost level | Horizontal, as fixed costs do not change with output |
| Variable costs | At the origin | Rises steadily, as no output means no variable costs |
| Total costs | At the fixed cost level | Parallel to the variable cost line, as total costs are fixed costs plus variable costs |
The vertical gap between the total cost line and the variable cost line always equals the fixed costs.
Reading profit and loss
The break-even point is where the total revenue line crosses the total cost line, so revenue equals total costs. Below the crossing, the total cost line sits above the revenue line, so the business makes a loss. Above it, revenue is higher, so the business makes a profit. The vertical gap between the two lines at any output is the size of that profit or loss.
For example, a T-shirt printer sells each shirt for £13, pays £4 variable cost per shirt and has fixed costs of £450 a month. At 30 shirts, revenue is £390 but total costs are £570, a loss of £180. At 50 shirts, both lines meet at £650. At 80 shirts, revenue is £1,040 against costs of £770, a profit of £270.
Why the diagram helps
- It shows the break-even output without any calculation.
- It shows the profit or loss at any level of output.
- The horizontal distance between planned sales and the break-even point is the margin of safety: how far sales could fall before losses begin.
- Managers use it to set sales targets and to monitor actual performance against the break-even plan.
Practise this
Edexcel GCSE Business · 1.3.2 Business revenues, costs and profits