The break-even point can be calculated by drawing a graph showing how **fixed costs**, **variable costs**, **total costs** and **total revenue** change with the level of output.

Here is how to work out the break-even point - using the example of a firm manufacturing compact discs.

Assume the firm has the following costs:

**Fixed costs: £10,000. Variable costs: £2.00 per unit**

First construct a chart with output (units) on the horizontal (x) axis, and costs and revenue on the vertical (y) axis. On to this, plot a **horizontal fixed costs line** (it is horizontal because fixed costs don't change with output).

Then plot a **variable cost line** from this point, which will, in effect, be the **total costs line**. This is because the fixed cost added to the variable cost gives the total cost.

To calculate the variable cost, multiply **variable cost per unit x number of units**. In this example, you can assume that the variable cost per unit is **£2** and there are **2,000 units** = **£4,000**.

Now plot the total revenue line. To do this, multiply:

**sales price x number of units (output)**

If the sales price is **£6** and **2,000** items were to be manufactured, the calculation is:

**£6 x 2,000 = £12,000 total revenue**

Where the total revenue line crosses the total costs line is the **break-even point** (ie costs and revenue are the same). Everything below this point is produced at a loss, and everything above it is produced at a profit.