![]() ![]() You know that this crosses the TR line at the BEQ, and that it starts at the FC at output zero, so draw it. ![]() Remember, fixed costs are the costs of producing at 'output zero'.įigure 7 Building a break-even diagram from scratch (4) Step 7 Add the TC Line So mark on the Y axis the value of the FC. You also know that TR = $1.92 million when sales = 16,000įigure 6 Building a break-even diagram from scratch (3) Step 6 Add the FC lineįixed costs are the same, irrespective of output. This passes through the origin, since there is no revenue if there are sales. In this case the maximum revenue is 16,000 x $120 = $1.92 million (price per unit x maximum possible sales).įigure 5 Building a break-even diagram from scratch (2) Step 5 Plot the TR axis If not, double the break-even quantity is a good guide figure, or 16,000 units in this case.įigure 4 Building a break-even diagram from scratch (1) Step 4 Fix the Y axis (revenue and costs) If you are given a maximum capacity, use that figure. You will be able to start drawing very soon! For example, for every 2000 units of output: Immediately from the table, it can be seen that the break-even point is 8000 units where TR = TC and profit is zero.Īlso notice the patterns in the table which make the calculations easier. If each unit sold covers its variable (direct costs) and then contributes another $20 to fixed costs, it is very easy to say when fixed costs will be paid, e.g. This break-even formula is very logical really. So, for simplicity, we will define contribution here as contribution to fixed costs. In a break-even question there are two terms you will probably never see:īoth these terms add unnecessary complications to the analysis and are not used. We have already discussed contribution in some detail and said its full title is contribution to fixed costs and overheads. The break-even formula is relatively simple: per year, then the costs are fixed costs. If costs are 'per unit' or 'per number made or sold' then the cost concerned is variable. Do not be confused by the title, or name, but look at the units given. The decision whether a cost is fixed and variable sometimes causes problems. Assume you have extracted the following information from your case study: You should now have identified: FC per period of time, price per unit and VC per unit. Break-even graph showing revenue, total costs, fixed costs, profit and loss. (The use of case study questions and the provision of written stimulus material provides the scope for the 'hiding' of data.) Everything shown below this point is loss, and everything above it is profit. Step 1 Extract the dataĮxtract the data required from the question or text. Remember the alternative words for fixed and variable costs. You will be given fixed costs, price and variable costs for a product and a period of time. Having read the question you may now start to follow a procedure. ![]() Think first, and you will see it is wise to work out the BEQ before putting pencil to paper.
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