Break-Even: Worked example
Gadgets Direct has the following cost and price information:
Direct labour: $25 per unit
Raw and packing materials: $15 per unit
Management costs - direct: $5 per unit
Indirect management costs: $25,000 per week
Variable overheads: $7 per unit
Fixed costs: $35,000 per week.
Price: $82 each
You are asked to draw a break-even chart for the firm.
In this case:
- variable costs are $52 per unit - the sum of all the 'per unit' costs.
- fixed costs are $60,000 per week - the sum of all the 'per week' costs.
Then follow the step-by-step procedure to draw the chart.
Steps 1 and 2 are done already.
Before you move on to step 3, draw up a table to support the graph.
Then draw the chart as you complete each step.
Step 3: 2 x 2,000 = 4,000 units per week maximum on X axis
Step 4: 4,000 x $82 = $328,000. Set Y axis to a maximum of $400,000.
Step 5: TR line goes from zero to $328,000, 4,000 units per week.
Step 6: FC are $60,000, so mark them on the Y axis
Step 7: Mark the break-even point on the TR line, and complete the TC line.
Add labels and title, and the diagram is finished. Now, follow the link to the answer and see if you have got it right.
Break-even analysis is a good way of presenting data in a visual form, and is easy to understand. However it has major limitations, which only HL students need to consider in any depth. Firms use break-even analysis where appropriate, but only as part of a comprehensive decision-making process. Break-even analysis is only one of a number of business tools a firm has in its toolbox and is best used with other tools to ensure that the firm has a solid foundation on which to base its decisions.