The area between the 'Total revenue' line and the 'Total costs' line to the right of the break-even point represents:

Explanation:

Profit Zone:

• The break-even analysis is a vital tool in understanding the financial health of a business. The area between the 'Total Revenue' line and the 'Total Costs' line to the right of the break-even point represents the profit zone. This is the region where a company starts generating profit after covering all its costs (both fixed and variable).

Break-even chart:

• The break-even analysis is the study of cost-volume-profit (CVP) relationship in which a graph is drawn between volume of production (Quantity) and income (Sales).
• It refers to a system of determining that level of operations where the organisation neither earns profit nor suffer any loss i.e where the total cost is equal to total sales i.e the point of zero profit (Break-even point).
• In a broader sense, it refers to a system of analysis that can be used to determine probable profit at any level of activity.
• The figure below shows the break-even chart.

The various point mentioned in the graph are:

Fixed cost:

• The cost which does not change for a given period (lifetime).
• This cost is independent of the volume of production (means it doesn’t affect by whether the production is large or small).
• For example, rent, taxes salaries of the supervisor, cost of the machine, insurance cost, etc.

Variable cost:

• This cost varies directly and proportionally with the output.
• Higher the output, larger the variable cost.
• For example, the cost of raw material, cost of labour, etc.

Total Cost:

• Total cost is the sum of fixed cost and variable cost.

Total revenue/sales:

• It indicates the return obtained by selling the number of units produced.
• It is directly proportional to the volume of production.

Margin of safety:

• The Margin of safety is the distance between the break-even point and output is produced.
• A large margin of safety indicates that the business can earn profit even if there is a great reduction in output.
• A small margin of safety indicates that the profit will be small even if there is a small drop in output.

Break-even point:

• It is the point of intersection of the total cost line and total revenue line.
• There is neither profit nor loss at the break-even point.