Simper Ltd produces a single product which sells for £20. The product itself costs £12 to produce and fixed costs for the business are £50,000 per year. The following is a schedule of the costs and revenue of the business for varying levels of output.
|
Output (units) |
Fixed costs |
Variable costs |
Total costs |
Total revenue |
Profit |
|
0 |
50,000 |
0 |
50.000 |
0 |
(50,000) |
|
1,000 |
50,000 |
12,000 |
62,000 |
20,000 |
(42,000) |
|
2,000 |
50,000 |
24,000 |
74,000 |
40,000 |
(34,000) |
|
3,000 |
50,000 |
36,000 |
86,000 |
60,000 |
(26,000) |
|
4,000 |
50,000 |
48,000 |
98,000 |
80,000 |
(18,000) |
|
5,000 |
50,000 |
60,000 |
110,000 |
100,000 |
(10,000) |
|
6,000 |
50,000 |
72,000 |
122,000 |
120,000 |
(2,000) |
|
7,000 |
50,000 |
84,000 |
134,000 |
140,000 |
6,000 |
|
8,000 |
50,000 |
96,000 |
146,000 |
160,000 |
14,000 |
|
9,000 |
50,000 |
108,000 |
158.000 |
180,000 |
22.000 |
|
10.000 |
50,000 |
120,000 |
170,000 |
200,000 |
30,000 |
At low levels of output, the firm incurs a loss as the revenue is not high enough to generate sufficient contribution to cover the fixed costs of the business. However, we see that as output rises from 6,000 units to 7,000, the firm moves from making losses to generating profits, which rise as output increases. We can infer, therefore, that the break-even level of output is somewhere between 6,000 and 7,000 units.