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Interpreting Break-Even Charts

Reading a break-even chart: finding the break-even output where revenue meets total costs, working out the margin of safety, and judging how useful break-even analysis really is.

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Reading a break-even chart

A break-even chart shows two lines against output: total revenue and total costs. The break-even output is where those two lines cross, the point where revenue exactly equals costs, so the business makes neither a profit nor a loss. Sell fewer than that and costs are higher than revenue, giving a loss. Sell more and revenue is higher than costs, giving a profit. The gap between the output a firm actually sells and its break-even output is the margin of safety, showing how far sales could fall before a loss begins. You will not have to draw a chart or use a formula, only read one that is given. Break-even analysis is useful for planning, but it has limits. This module shows how to interpret the chart and judge its value.

Break-even words

Learn these before you read any chart, and keep the break-even point and the margin of safety apart.

Below break-even against above

Which side of the break-even output a firm is on decides whether it makes a loss or a profit.

How to read a break-even chart

Work the chart in two moves. First find where the revenue line and the total cost line meet, and drop straight down to the output axis to read the break-even level. Then look along to the output the firm actually sells and measure back to that break-even level; the distance between them is the margin of safety. A wide margin means sales can fall a long way before a loss, a narrow one means danger. Read the crossing point first, then the gap.

Match the term to what it means

  • break-even output
  • margin of safety
  • total revenue
  • a loss
  • the output where total revenue equals total costs
  • how far actual output is above break-even
  • the money brought in from all units sold
  • when total costs are greater than revenue

What does the crossing point show?

On a break-even chart, the total revenue line and the total cost line cross at one point. What does that crossing point show?

  • The break-even output, where revenue equals total costs.
  • The maximum profit the firm can make.
  • The margin of safety.
  • The average rate of return.

Reading the chart

Select the TWO statements that are true about a break-even chart.

  • The break-even point is where the two lines cross
  • The margin of safety is the gap between actual and break-even output
  • The firm makes a profit below the break-even output
  • The chart shows the average rate of return

Margin of safety

A firm has a break-even output of 400 units and actually sells 600 units. Subtract to find its margin of safety, in units.

Order reading the chart

Put the steps of reading a break-even chart in order, earliest first.

  • Find where the revenue and total cost lines cross
  • Read the break-even output below that point
  • Find the output the firm actually sells
  • Take the gap between them as the margin of safety

Complete the facts

The output where total revenue equals total costs is the _____ output. The point where the two lines cross on the chart is the break-even _____. The gap between actual output and break-even output is the margin of _____. Selling fewer units than break-even gives the firm a _____.

break-even point safety loss revenue profit return margin

Match the point to whether it helps or limits

  • it shows the output needed to avoid a loss
  • it helps plan and support a loan request
  • it assumes every unit made is sold
  • it assumes costs and prices never change
  • a benefit of break-even analysis
  • a second benefit, useful to a lender
  • a drawback, since unsold stock is ignored
  • a drawback, since the real world shifts

Spot the true break-even facts

Tap the TWO statements that are true about break-even.

  • At break-even, total revenue equals total costs
  • A wide margin of safety means sales can fall further before a loss
  • A firm below its break-even output is making a profit
  • The exam requires you to draw the break-even chart

Read the break-even

Read each case and choose the best response, with a reason.

  • A firm sells 500 units and its break-even output is 500 units. What is its position?
  • Two firms have the same break-even output, but Firm A sells far more units than Firm B. What does this tell you?
  • A student treats a break-even chart as if it proves exactly what will happen. Why is that a weakness?

Interpret a break-even chart

A firm shows you a break-even chart with a break-even output of 400 units, while it currently sells 600 units. Explain what the chart tells the firm and how useful break-even analysis is.

  • Explain what the break-even output means
  • Explain how to find the margin of safety from the figures
  • State the margin of safety for this firm
  • Give one benefit of break-even analysis to the firm
  • Finish with a judgement on a drawback that limits how far it should be trusted