Economic Concepts

Capacity and Break-Points in Cost Structures

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So if the Basic Business Graph at the top of this page is correct, why not just run the business wide open and sell everything to everyone all the time?  Keep moving to the right on the curves?

 

Good question.
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So here is the Basic Business Graph Plus (Like the "all new" F-150 or My Pillow II, right?).

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A company can move to the right along the cost line, past break-even into the profit side and then...a brick wall.  The company has truly reached 100% long-term capacity.  Every machine is manned, a second-shift has been added, trucks are running to the maximum limits for drivers.  There is nothing more to give.

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This is when the company expands to continue moving up the profit side of break-even.  It raises total costs on a single-point (break-point) by say $1 million for staff and buildings and equipment, then starts moving to the right again.

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Make sense?