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Break-Even

Look back at the scenario regarding Fruit28(http://www.bized.co.uk/educators/level2/finance/activity/busaccounting11.htm). You will notice from this that Fruit28 had to spend out some money on buying the shed, the lab coats, the money box and display boxes before it even sold one apple.

The costs represented by these items are sometimes called 'set up costs'. These are the costs which have to be paid out to get the business set up - every firm will have to pay out these costs but in some cases they are much much bigger than others. For example, the cost of building the Channel Tunnel ran into billions of pounds and took many years to finish before any car or train paid to use the tunnel! Alex Tew, on the other hand, set up a Web site selling pixels. (see this ITN for more details). His set up costs were much smaller by comparison.

We can present this information on a graph which charts the costs against the amount produced.

Trading Costs

Having got the business set up by buying the shed and so on, Fruit28 then had to get some stock - the fruit they are going to sell. They bought the fruit from an uncle of one of the team, who also agreed to deliver it to them - at a cost! In buying the fruit and having to pay for the delivery, the business is incurring additional costs.

Let us assume that the uncle delivers a consignment of fruit for the firm's first day of trading, but no one comes to buy it. They will still have to pay the uncle for the delivery whether they sell any fruit or none at all! Delivery, therefore, is also a 'fixed cost' - a cost that does not depend on the amount the business produces or sells.

Delivery costs have to be considered as a fixed cost - Fruit28 will have to pay the uncle for the delivery whether they sell any of the fruit he delivers or not!
Copyright: Richard S, from stock.xchng.

The fruit, however, is slightly different. If they buy 50 apples and the cost of each apple is 15p, they will have costs of £7.50. If they buy 100 apples at 15p each, then their costs will rise to £15. In this simple example, the cost of the fruit is said to be a 'variable cost'. Variable costs rise with the amount produced/sold.

We can now add this information to our graph.

Look at the following table:

Remember that the delivery costs will have to be added to the set up costs and classed as fixed costs. Assume that there are five days in each week and that we are charting the data over a period of a week.

Please go here for a printable version.

Please go here for the completed version.

We know from our earlier discussion that TC = FC + VC. We can now find out what the total costs are for producing/selling different amounts of fruit each week.

Add together the variable cost for producing/selling 10 items of fruit (for example) with the fixed costs, then the variable costs of producing 20 with the fixed costs etc. Now plot this line onto your chart and label it 'Total Costs'.

You should end up with a chart that looks something like this:

Having a chart like this allows us to be able to identify the likely costs of producing/selling different amounts of fruit.

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