Figure 4 Break – even chart Costs/ revenue (£ 000)
500
400 3 Revenue
350 5
250 4 Break – even point 2 Total costs
200
150 1 Fixed costs
100
50 6 7
0 10 20 30 40 50 60 70 80 90 100
Output (000s)
1. Fixed costs stay the same irrespective of output.
2. Total costs = total fixed costs + total variable costs. As we saw in Figure 3 the total variable cost curve passes through the origin. By introducing fixed costs we have added a constant to the equation which defines the curve. The total cost curve always cuts the vertical axis at the level of fixed costs.
3 The revenue line is found by multiplying the selling price of each unit by the level of output. In this instance the selling price is £4.
4 The point at which the revenue curve and the cost curve intersect is the break-even point.
5 To the right of the break-even point revenue is greater than total cost. The vertical difference between the two curves at any given point will give the total profit.
6 To the left of the break-even point a similar calculation to that described in 5 will give the total losses of the business at any given level of output.
7 If the business is operating at 70 per cent capacity it will still make a profit. The difference between the output at which a business is operating and the break-even output is known as the margin of error.
2.Comprehension check.
1. Reading from the information given in Figure 4, state whether or not the business will be making a profit or loss at each of the following levels of capacity: 20000, 35000, 55000, 70000, 90000.
2. What is the margin of error when output is 80000 units?
Writing
Look at the diagram below showing the break-even point for a business. Then complete the description below using words from the box.
break - even point loss sales revenue variable costs
fixed costs profit total costs
£
Sales revenue
profit
Total costs
X
Variable costs
loss
Fixed costs
A
0 break – even point Amount of sales
The horizontal line shows (1)........................ The dotted line which starts at point 0 shows the (2).......................... for different levels of sales. The (3)....................... are fixed costs and variable costs combined. The solid line starting at point 0 shows the (4).............................................. at different levels of units sold. Point X is the (5)........................ To the left of pointX, the business is making a (6)................... To the right, the business is in (7).......................
Reading
1.Read text 18 using your dictionary to help with new words.
Text 18
Date: 2015-12-24; view: 424
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