The figure shows when the company will earn net income or incur a loss. When the sales curve exceeds total costs, the company earns net income (represented by the shaded right side of the X). However, if total sales is too low to exceed total costs, then the company incurs a net loss (the shaded left side of the X).
The higher the sales volume — that is, the more sales volume moves to the right of the graph — the higher the company’s net income.
Dropping numbers into the chart shows exactly how much income can be earned at different sales levels. Assuming Pemulis has a sales price of $15 per unit, a variable cost per unit of $6, and total fixed costs of $300, what happens if Pemulis sells 60 basketballs?
Total sales come to $900 (60 units x $15). Total variable costs multiply to $360 (60 units x $6). Add these total variable costs to total fixed costs of $300 to get total costs of $660.
Total sales ($900) sits on the Total sales line. Total costs ($660) sits on the Total cost line. The difference between these amounts ($240) represents the net income from selling 60 units.