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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).......................
Vocabulary
Use your dictionary to look up any new words.
1. Write the following words in the correct column.
absorption fixed produce (2) result (2) approach(2) job packaging plant (2) brand (2) cope with blend (2) perforation(s)
design(2) distinctive aim (2) acquire allocate length
useful valuation reliable guidance involve subjectively objectively
marginal accept short-run operate distinction revenue contribution loss lease (2) regret(2) decline(2) trading legally liable
incur staff (2) expenses leading(2) mail(2) supply(2) inclination closely include contribute overall objective(2) record (2) performance indication clarify discover increase(2) variance box (2)
| Nouns (36) | Verbs (28) | Adjectives (10) | Adverbs(4) |
| Absorption |
2. Which verbs in A can go with nouns in B?
E.g: to make teabags
A
make cope with involve accept minimize discontinue suggest generate produce reduce include do cover introduce set clarify calculate
B
distinction look at method teabags variance trading brands revenue calculations target services costs product debt decisions losses order
3. Combine a word in A with a word in B to form a suitable noun phrase.
E.g: absorption costs.
A B
1) absorption 1) tea
2) fixed 2) statistics
3) packaging 3) costs
4) different 4) area (s)
5) particular 5) shop
6) general 6) plant
7)finished 7) expenses
8) semi – finished 8) catalogue
9) reliable 9) element
10) marginal 10) calculation
11) certain 11) indication
12) full 12) costing
13) direct 13) gates
14) a loss – making 14) performance
15) trading 15) brand
16) living 16) process
17) steel 17) goods
18) summer 18) figures
19) rapid 19) capacity
20) indirect
21) standard
22) detailed
23) production
24) historic
25) important
26) better
27) clear
28) inefficient
29) actual
30) total
Pre-reading task
Work in small groups.
You know already that costing is the process of identifying and allocating the costs associated with the production of a good or service. Each business enterprise facing the wide variety of problems uses a number of costing techniques. Do you have any idea what these techniques are?
Reading
1. First read text 14 quickly. Can you find any proofs of your suggestions?
Text 14
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