Break-even
A business needs to calculate how many products they will have to sell to make a The surplus remaining after all costs have been deducted. Break-even is when a business has sold enough products to cover all costs.
Costs can be split into two types
- fixed costs
- variable costs
Fixed costs are costs that do not change with the level of production, such as as rent.
Example: Rent will be 拢1000 if one item is produced and it will be 拢1000 if five hundred items are produced.
Variable costs are costs that change with output, such as raw materials.
Example: If the ingredients to make one cake costs 拢5 the variable cost for one cake would be 拢5 but the variable cost for ten cakes would be 拢50.
Total costs of a business are the fixed costs added to the variable costs. A business needs to be able to pay the total costs of the business before it starts to make a profit.
At the break-even point a business will make neither a profit nor a loss.
Break-even chart
Break-even charts can be used to show how many products need to be sold for a business to break-even. The below break-even chart shows the This is the total value of the goods sold to customers, total costs and fixed costs lines.
The point at which the sales revenue line crosses the total costs line represents the break-even point.
Any level of output below the break-even point would mean the business is making a loss. A level of output above the break-even point will mean the business is making a profit.