Break Even Analysis Chart
A Break Even Analysis Chart is a graphical representation of the point at which total revenue equals total costs, resulting in zero profit or loss. It helps businesses determine the level of sales needed to cover all costs and reach profitability. The chart typically shows fixed costs, variable costs, total costs, total revenue, and the break-even point.
8 Key excerpts on "Break Even Analysis Chart"
eBook - ePub- Richard Kotas(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...5 Break-Even Analysis Introduction A simple break-even chart has already been illustrated. The purpose of the present chapter is to describe different kinds of break-even charts and show their applications to a variety of different situations. The term ‘break-even chart’ is rather unfortunate in that it focuses attention on one particular aspect of what is, in fact, a complex set of sales—cost—profit relationships. The principal aim of the break-even chart is not merely to ascertain the actual or potential break-even point, but also to show what net profit or loss will obtain over the whole range of activity, at what rate net profit will accrue when sales increase above the break-even point, the degree of profit stability of the business, etc. One of the main objectives of the break-even charts is to show, preferably in simple terms and without excessive detail, the total sales—cost—profit picture of the business. If it is to achieve this objective, it must be presented as an elegant, well thought-out document and create the right kind of visual impression. It is, consequently, better for the break-even chart to show only the essential data; other information may be given in appropriate schedules, profitability statements and similar documents. Basic break-even chart The basic break-even chart is the starting point for a more detailed consideration of break-even analysis. Let us therefore take a simple example, construct a basic break-even chart and then look at some of its main features. Figure 5.1 Basic break-even chart It is assumed that a business has up to 10,000 customers per month and that its ASP is £10.00. Monthly fixed costs are £40,000 and variable costs are incurred at the rate of 40 per cent in relation to the volume of sales. The break-even chart for this operation would appear as shown in Figure 5.1. The information disclosed by the break-even chart is as follows. Break-even point This is reached when the number of covers is over 6,500...
eBook - ePub- Nathalie Evans, Michael Jeffrey, Susan Craig(Authors)
- 2020(Publication Date)
- Bloomsbury Visual Arts(Publisher)
...10 Break-even analysis Introduction This chapter focuses on break-even analysis and uses the same classification of costs as the previous chapter on marginal costing. Indeed, it is an extension of the marginal costing and the use of the fixed and variable cost concept. The objective of break-even analysis is to establish the point at which the business will reach its break-even point. The break-even point is the point at which the business will make neither a profit nor a loss – the revenues will exactly cover the costs. In the short term, this is a useful piece of information as it gives management an understanding of what level of business that they need to achieve to at least cover their costs. Beyond the break-even point the business will go into profit; thus the sooner the business passes through its break-even point, the sooner it will become profit earning. Establishing the break-even point There are a number of ways in which the break-even point can be established: 1.By tabulating the output, costs and revenues of the business and seeing where the break-even point will fall in the table. 2.By construction a break-even chart and graphically establishing where the break-even point falls or a variation on this like a profit/volume chart. 3.By calculating the break-even point. Break-even tabulation The tabulation essentially matches the fixed costs and the variable costs at different levels of output with the revenues generated at those levels of output. Example Morning Breaks Ltd have received an order to make 5,000 dresses and the customer is prepared to pay £15 for each dress making the total order worth £75,000. The fixed costs for the period are as follows: £ Rent 9,000 Business rates 1,200 Loan interest 250 Insurance 300 Other fixed costs 1,250 Total £12,000 The variable costs of making the dresses are as follows: £.p Direct materials 6.00 Direct...
eBook - ePubProduction Economics
Evaluating Costs of Operations in Manufacturing and Service Industries
- Anoop Desai, Aashi Mital(Authors)
- 2018(Publication Date)
- CRC Press(Publisher)
...12 Break Even and Benefit Cost Analysis 12.1 What Is Break Even Analysis? Break even analysis is a very important tool that is commonly used in economic decision making. The essence of break even analysis is that in every business scenario, there will be a situation wherein the total cost incurred in producing a product or offering a service will invariably be offset by the total revenue obtained from selling it. This scenario is referred to as break even. “Breaking even” occurs when the total cost is equal to total revenue implying that neither any profit nor loss is incurred. It can also be used to compare process costing between different alternative processes. Break even analysis is used for a variety of economic evaluations such as: • To compare different processes of manufacturing in order to determine the most economical option at various production levels. • Once the production run (level) has been determined, it is necessary to establish the minimum selling price of the product. Break even analysis is helpful in this evaluation. If revenue is equal to total production cost, then the minimum selling price of the product will have to be equal to total production cost (which is equal to revenue at break even production levels) divided by the number of units produced (production run). • To determine the actual number of units that has to be produced so that total revenue will be equal to total cost. This production run is referred to as break even point. It will be obvious from the preceding discussion that in order to use break even analysis, it is essential to be able to correctly evaluate total cost of production. We have already dealt with this concept in previous chapters. In Chapter 2, we dealt with cost estimation, in Chapter 3, we dealt with material costing, Chapter 4 considered process costing and overhead costs and capital expenses were dealt with in Chapters 5 and 6...
- Elizabeth Marquez, Paul Westbrook(Authors)
- 2007(Publication Date)
- Corwin(Publisher)
...Then have them prepare a pro forma for 3 years. Finally, have them calculate the various percent comparisons, as above, and explain the numbers. TEACHING EXAMPLE 8.2 Revenue, Costs, and Break-Even Points NCTM Content Standards Numbers and Operations; Algebra Process Standards Problem Solving; Reasoning and Proof; Communication; Connections; Representation Money Applications Students will Read a break-even graph Interpret points and slope in the context of business Find equations of revenue and cost lines to determine the break-even point Discussion and Questions Tell students that one of the most critical calculations that someone starting his or her own business must do is to determine when the revenue from sales will cover his or her costs of doing business. The point at which this occurs is called the break-even point for that business. A break-even analysis shows at what point a profit can begin to be earned. It usually is used for a startup business, but it can also be used when a company wants to improve its profits. It is a graphic display showing the various incomes and costs, given amounts of output. Here is an example of a break-even analysis: Tell students that fixed costs are the basic costs of maintaining a store or factory even if no products are made and sold. Ask students the following: What the graph says about fixed costs Find the equation of the fixed cost line Correct responses are as follows: The graph tells us that no matter how many products are sold, fixed costs will always be $50,000. That is why the graph shows a horizontal line. The equation is y = 50;000. Tell students that variable costs are those costs that increase as production increases, such as costs of materials and employees...
eBook - ePubThe Business Plan Workbook
A Step-By-Step Guide to Creating and Developing a Successful Business
- Colin Barrow, Paul Barrow, Robert Brown(Authors)
- 2021(Publication Date)
- Kogan Page(Publisher)
...ASSIGNMENT 20 Break-even analysis Calculating your break-even point Let’s take an elementary example: a business plans to sell only one product and has only one fixed cost, the rent. In Figure 20.1 the vertical axis shows the value of sales and costs in thousands of pounds, and the horizontal axis the number of ‘units’ sold. The second horizontal line represents the fixed costs, those that do not change as volume increases. In this case it is the rent of £/$/€10,000. The angled line running from the top of the fixed costs line is the variable costs. In this example the business plans to buy in at £/$/€3 per unit, so every unit it sells adds that much to its fixed costs. Figure 20.1 Graph showing break-even point Figure 20.1 details The details of the line graph are as follows: The horizontal axis representing units ranges from 1000 to 7000 in increments of 1000. The vertical axis representing cost and revenues in thousands of currency units ranges from 5 to 25 in increments of 5. A horizontal line representing fixed cost passes through (0, 10) parallel to the horizontal axis. A diagonal line starting at (0, 10) and passing through (5000, 25) represents variable cost and another diagonal line starting at (0, 0) and passing through (5000, 25) represents total cost. The lines variable cost and total cost intersect at (5000, 25) and it is labelled break-even point. The sales revenue is above the break-even point in the total cost line. Only one element is needed to calculate the break-even point – the sales line. That is the line moving up at an angle from the bottom left-hand corner of the chart. The business plans to sell out at £/$/€5 per unit, so this line is calculated by multiplying the units sold by that price. The break-even point is the stage at which a business starts to make a profit...
eBook - ePubReturn on Investment Manual
Tools and Applications for Managing Financial Results
- Robert Rachlin(Author)
- 2019(Publication Date)
- Routledge(Publisher)
...16 How to Use Break-Even Techniques for ROI Decision Making A business must know what volume of activity is needed to cover all expenses over and above the cost directly associated with the product and/or company activity. To put it another way, how many dollars of sales are needed to cover the company’s fixed costs? At this point, revenues generated and costs incurred are equal, and neither a profit nor a loss will materialize. When this occurs, the results are said to be at the break-even point, that is, the point where variable costs and fixed costs equal net sales dollars. This concept can be expressed in numerical terms by the use of formulas or graphically by the use of a break-even chart. In any case, the shifts or changes in revenues and costs are ultimately reflected in the operations of the business, as well as in the return on investment objectives. Thus break-even analysis can be an important tool in managing the business by providing the necessary information for effective decision making. It can aid in making decisions in pricing, financing, capital investments, setting ROI objectives, and other decisions where volume, cost, price, and profits are factors. Nevertheless, certain conditions have to be assumed when using this technique. Because various volume levels will be used to show the influence on the break-even point, it is assumed that changing sales volume will not have any effect on the per unit selling price. It is also assumed that both types of expenses, variable and fixed, will react differently...
eBook - ePubThe Strategy and Tactics of Pricing
A Guide to Growing More Profitably
- Thomas T. Nagle, Georg Müller(Authors)
- 2017(Publication Date)
- Routledge(Publisher)
...Note in Exhibit 9-6 that the vertical axis shows different price levels for the product, and the horizontal axis shows a volume level associated with each price level. Each point on the curve represents the sales volume necessary to achieve as much profit after the price change as would be earned at the baseline price. For example, Westside’s baseline price is $10 per unit, and baseline sales volume is 4,000 units. If, however, Westside cuts the price by 15 percent to $8.50, its sales volume would have to increase 70 percent to 6,800 units to achieve the same profitability, to cover both the decrease in contribution as well as the incremental fixed costs. Conversely, if Westside increases its price by 15 percent to $11.50, its sales volume could decrease 25 percent to 3,000 units and still allow equal profitability. The breakeven sales curve is a simple, yet powerful tool for synthesizing and evaluating the dynamics behind the profitability of potential price changes. It presents succinctly and visually the dividing line that separates profitable price decisions from unprofitable ones. Profitable price decisions are those that result in sales volumes in the area to the right of the curve. Unprofitable price decisions are those that result in sales volumes in the area to the left of the curve. What is the logic behind this? Recall the previous discussion of what happens before and after a price change. The breakeven sales curve represents those sales volume levels associated with their respective levels of price, where the company will make just as much net contribution after the price change as it made before the price change...
eBook - ePub- Cloete M, Marimuthu F(Authors)
- 2019(Publication Date)
- Van Schaik Publishers(Publisher)
...290 16 Cost-volume-profit (CVP) analysis Outcomes At the end of this chapter students should be able to: describe cost-volume-profit analysis calculate breakeven point use cost-volume-profit analysis to estimate profits calculate and evaluate the effect of changes in selling prices, volume and costs. Chapter outline 16.1 Introduction 16.1.1 Fixed costs 16.1.2 Variable costs 16.1.3 Marginal costing layout 16.2 Assumptions of CVP analysis 16.3 CVP according to the contribution margin approach 16.3.1 Calculation of breakeven point 16.3.2 Calculation of margin of safety 16.3.3 Sales required to achieve expected (target) profit or return 16.4 Using CVP analysis in decision making 16.4.1 Change in the selling price 16.4.2 Change in the variable cost 16.4.3 Change in the fixed cost 16.5 Summary of formulae needed for CVP analysis 16.5.1 Breakeven point in units 16.5.2 Breakeven point in rands 16.5.3 Sales necessary to make a desired profit 16.5.4 Margin of safety 16.1 Introduction Cost-volume-profit (CVP) analysis is a decision-making tool that helps management determine the effects that changes in costs, price, quantity and mix will have on future profits. Managers commonly use CVP analysis as a tool to answer questions such as the following: How much can sales drop before the company will incur losses? How will a change in costs, price or volume affect profits? How many units must be sold to achieve a planned profit? What profit will a certain sales volume yield? At what volume of production are costs and income equal? 291 In Chapter 15 you were introduced to the marginal income statement where fixed costs and variable costs are shown separately. Management requires cost information in a format that promotes their planning, control and decision-making tasks...
