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.