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Adding Revenue

We can now move on to look at the effect of revenue on the whole position. We have been able to see what happens to the cost of producing fruit depending on how many items of fruit we might be able to produce/sell. Similarly, we can estimate how much money we would receive from selling our fruit, depending on how many pieces we sold.

Selling fruit will bring in revenue that will start to cover some of the costs - but how many pieces of fruit need to be sold before we start to make a profit? Copyright: Makkai Bence, from stock.xchng.

If we assume that, as with the costs, we take the sum of all the prices charged for each piece of fruit as the 'price' for our calculation then if each piece of fruit is priced as follows:

• Apples: 20p each
• Oranges: 15p each
• Bananas: 15p each
• Grapes: 60p per bunch
• Strawberries: £1.20 per punnet
• Pears: 30p each

The total price received is £2.60. We can now make an estimate of what we would earn in revenue by selling different amounts of fruit - again, use the table below to help you calculate this.

Please go here for a printable version.

Please have a look at the completed table.

Now add your revenue line to your diagram. You should end up with something that looks like this:

Again, our diagram can tell us a number of things. Not only can we tell what the costs and revenues are up to 100 items produced/sold, but also we can estimate the costs and revenues beyond that by extending the lines on our graph. (Technically this is called extrapolation). Extrapolate the TC and TR lines as far as your graph will allow.

The Break-even Point

From the graph and the analysis of the graph, we can see that at some sales levels, Fruit28 will not be covering their costs and so will be making a loss. However, there will come a point at which they will just sell enough fruit to generate enough revenue to just cover the costs - this is the break-even point.

The break-even point occurs where TR = TC and is the point on our graph at which the two lines cross. We can thus estimate the number of sales needed, assuming we are charging a price of £2.60, to break even. Armed with this information, Fruit28 can monitor their sales to check how they are doing. If they sell more fruit than the break-even level of sales, they will be making a profit on each piece of fruit sold.

We can illustrate this on the diagram as follows:

Apart from using a diagram, we can also use a simple formula to calculate the break-even level of sales. This formula is:

The Contribution is the selling price minus the variable cost. In our example, therefore, the selling price is £2.60 but the variable costs are £2.15. The contribution is therefore 0.45 (45p).

It is called the contribution because this is the amount that contributes to the fixed costs. If we sell one 'piece' of fruit for £2.60 we know that it has cost us £2.15 to buy that fruit. We have made a gross profit of 45p.

However, we also know that we have incurred fixed costs - the costs we have to pay regardless of whether we sell any piece of fruit or not - and that these fixed costs are £60.

Our net profit is therefore found by taking the TR, £2.60, and subtracting the TC, £62.15. Our net profit is (£59.55). Remember that if a figure is put in brackets, it means it is a loss. The 45p gross profit has started to eat into the fixed costs by a little. Therefore, every additional item of fruit that we sell, assuming the price of fruit is still £2.60, will gradually chip away at the fixed costs until we break even.

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