Break Even Analysis Chart

As you might already know, break-even is a level of output at which revenues from sales equal total costs. It is the number of units a firm has to produce and sell to recover its total costs. To conduct the break-even analysis, we can either use a formula or a chart. Now, let's have a look at break-even analysis charts.

What is a break-even chart?

The break-even chart is a method of carrying out a break-even analysis.

The break-even chart includes four variables: fixed costs, variable costs, total costs, and revenue. Each of them is represented as a line that indicates its value depending on the level of output.

Table 1 - Types of Costs Definitions and Examples

How to draw a break-even analysis chart?

Drawing a break-even chart consists of six steps:

1. Draw axes.

2. Draw a line indicating fixed costs.

3. Draw a line indicating variable costs.

4. Draw a line indicating total costs.

5. Draw a line indicating revenue.

6. Mark the break-even point.

Step 1: Draw axes

First, we need to draw two axes:

• Vertical axis - this one will display costs.

• Horizontal axis - this one will display quantity.

Fig. 1 - Break-Even Chart Step 1

Figure 1 illustrates the two axes in the break-even chart (cost and quantity).

Step 2: Draw a line indicating fixed costs

Now we need to draw a line indicating fixed costs. Since fixed costs remain the same (in the short term), regardless of the number of units produced, this line will be horizontal and parallel to the axis that displays quantity.

Fig. 2 - Break-Even Chart Step 2

Figure 2 illustrates a horizontal line indicating fixed costs (FC) which are constant. Depending on its value, the line can be lower or higher on the chart.

Step 3: Draw a line indicating variable costs

Now we need to draw a line indicating variable costs. Since variable costs rise and fall in direct proportion to the number of units, the line will start at the intersection point of the axes and gradually increase.

Figure 3 illustrates a line indicating variable costs (VC). Depending on its value, the line can have a more vertical or horizontal inclination.

Step 4: Draw a line indicating total costs

Now we need to draw a line indicating total costs. Since total costs include both fixed and variable costs, the line will start at the intersection point of the cost axis and the line indicating fixed costs, and will gradually increase.

Fig. 4 - Break Even Analysis Chart Step 4

Figure 4 illustrates a line indicating total costs (TC). Depending on its value, the line can have a more vertical or horizontal inclination.

Step 5: Draw a line indicating revenue

Now we need to draw a line indicating revenue. Since revenue is directly related to quantity, the line will start at the intersection point of the horizontal and vertical axes and increase gradually.

Fig. 5 - Break Even Chart Step 5

Figure 5 illustrates a line indicating revenue (R). Depending on its value, the line can have a more vertical or horizontal inclination.

Step 6: Mark the break-even point

Now we need to mark the break-even point. The break-even point is the intersection point of the total costs and revenues lines.

Fig. 6 - Break Even Chart Step 6

Figure 6 illustrates the break-even point (🔴). The break-even point is the quantity (number of units) at a level where total costs and revenue intersect.

Break-even analysis chart example

Let's take a look at an example of a break-even analysis chart. Company Z produces chairs. The rental cost of a factory is £12,000 a month and bills are £3,000 a month. The selling price per chair is £1,000. The cost of materials per chair is £500. How many chairs per month does the company have to produce and sell to reach the break-even level of output?

Fig. 7 - Labelled break-even chart example

Figure 7 illustrates a labelled break-even chart for company X where:

R = revenue

TC = total costs

FC = fixed costs

VC = variable costs

🔴 = break-even point

These are the steps we followed drawing the break-even chart for the company X:

1. First, we drew two axes: a vertical one displaying costs and a horizontal one displaying quantity.
2. Then we drew a horizontal line indicating fixed costs (FC) that are £15,000. This is because the rental costs of the factory are £12,000 and bills are £3,000. So, £12,000 + £3,000 = £15,000.
3. Then we drew a line indicating that variable costs (VC) are £500 per unit. This is because the cost of materials per chair is £500. So, the variable cost of one chair is £500, the variable costs of two chairs are £1,000, etc.
4. Then we drew a line indicating total costs (TC). This line is parallel to the line indicating variable costs. However, it starts at the intersection point of the axis indicating costs and line indicating fixed costs.
5. Then we drew a line indicating revenue (R) which is £1,000 per unit. This is because the selling price per chair is £1,000.
6. Finally, we marked the break-even point (🔴) at the intersection point of lines indicating total costs (TC) and revenue (R).

This means that company Z has to produce 30 chairs a month to reach the break-even level.

What are the advantages break-even analysis chart?

Below you will find some advantages of using the break-even chart as a method to carry out the break-even analysis:

1. Helps in decision making: Break-even analysis helps businesses to make informed decisions by providing a clear understanding of the relationship between costs, revenues, and output.
2. Simplifies complex data: Break-even analysis charts simplify complex financial data into a clear visual representation.
3. Assesses profitability: Break-even analysis charts can help businesses to assess the profitability of different products, services, or sales channels by calculating the break-even point for each.
4. Sets sales targets: Break-even analysis charts can help businesses to set realistic sales targets and to understand the impact of changes in sales volume on their profitability.

What are the limitations of the break-even analysis chart?

There are several limitations of break-even analysis charts that businesses should be aware of:

• Simplifying assumptions: Break-even analysis relies on a number of simplifying assumptions, such as constant selling prices, fixed costs, and variable costs per unit. In reality, these assumptions may not hold, making the break-even analysis less accurate.
• Ignores non-financial factors: Break-even analysis does not take into account non-financial factors, such as customer satisfaction, market share, or quality, which can have a significant impact on a company's profitability.
• Time frame: Break-even analysis only considers the break-even point at a single point in time, and does not take into account changes in costs or revenues over time.
• Assumes linear relationships: Break-even analysis assumes that the relationship between costs, revenues, and output is linear, but in reality, these relationships may be more complex.