Learning Materials

Features

Discover

# 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.

#### Create learning materials about Break Even Analysis Chart with our free learning app!

• Flashcards, notes, mock-exams and more
• Everything you need to ace your exams

## What is a break-even chart?

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

There are two methods to carry out the break-even analysis: calculation and break-even chart. To learn more about the numeric way of calculating break-even, take a look at our break-even analysis calculation explanation.

Break-even is the 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.

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.

 Term Definition Example Fixed costs costs that remain the same regardless of the number of units produced rent, rates Variable costs costs that rise and fall in direct proportion to the number of units produced raw materials used in production, direct labour Total costs fixed costs and variable costs added together rent and rates, raw materials used in production and direct labour added together Revenue money earned from sales cash from sales

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.

Fig. 3 - Break Even Chart Step 3

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.

## Types of break-even chart

There are different types of break-even charts used by businesses to get different information to help with making decisions:

1. Simple break-even chart which shows the relationship between fixed costs, variable costs, and revenue at different levels of output. This chart is useful for determining the minimum level of sales needed to cover costs.

2. Contribution margin break-even chart which shows the break-even point in terms of the contribution margin (i.e., revenue minus variable costs) rather than total revenue. It is useful for analyzing the impact of changes in the sales mix or variable costs on the break-even point.

3. Profit break-even chart, which shows the break-even point in terms of profit rather than total revenue, is useful for analyzing the impact of changes in fixed costs on the break-even point.

4. Profit chart for product-wise analysis, which illustrates the profit or loss for each product or product line, allows businesses to identify which products are contributing the most to their profits or losses.

5. Cash break-even chart which shows the break-even point in terms of cash flow, taking into account the timing of cash inflows and outflows. It is useful for businesses that have uneven cash flows or large upfront investments.

6. Control break-even chart which illustrate the break-even point as a range, rather than a single point, allowing businesses to account for uncertainty or variability in their assumptions about costs and revenues.

## Break-even analysis charts - Key takeaways

• A break-even chart is a method to carry out the break-even analysis.
• Break-even chart includes four variables: fixed costs, variable costs, total costs, and revenue.
• To draw a break-even chart, we need to follow six steps: draw axes; draw a line indicating fixed costs; draw a line indicating variable costs; draw a line indicating total costs; draw a line indicating revenue; mark the break-even point.
• A break-even chart can be an easy but time-consuming method to carry out break-even analysis.
• It shows revenues and costs at different levels of production and allows us to see the interdependence between fixed, variable, and total costs, as well as revenue and quantity of units.
• A poorly drawn chart can give false results.

#### Flashcards in Break Even Analysis Chart 22

###### Learn with 22 Break Even Analysis Chart flashcards in the free StudySmarter app

We have 14,000 flashcards about Dynamic Landscapes.

What is the break-even chart?

The break-even chart is a method of conducting the break-even analysis. The break-even analysis shows the level of output at which revenues equal total costs.

How do you draw a breakeven chart step by step?

To draw a break-even chart, follow these six steps:

1. Draw axes
2. Daw 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.

What is an example of a break-even analysis chart?

The rental cost of a factory is £12,000 a month and the bills are £3,000 a month. The selling price per chair is £1,000. The cost of materials per chair is £500. After drawing the break-even chart, we can mark the point at which the revenue and total cost lines intersect, which is 30 chairs per month.

What are the advantages of break even analysis chart?

The break-even chart is easy to draw. It not only shows the amount of output by a company but also its costs and revenues at different output levels. Thus, by looking at the break-even chart, we can also find out about the business's fixed, variable, and total costs as well as sales, and quantity produced.

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

The break-even analysis chart can be time-consuming to draw and may give inaccurate results

How to draw a break-even chart?

There are six steps to follow to draw a break-even chart. They are as follows:

1. Draw axes
2. Daw 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.

What is a break-even level of output?

Break-even level of output is the point at which a company's total revenue equals its total cost, resulting in zero profit or loss. In other words, it is the level of output at which the company is able to cover all of its costs but has not yet generated any profit.

## Test your knowledge with multiple choice flashcards

What are the fixed costs?

Which of these is a variable cost?

Rent is an example of...

StudySmarter is a globally recognized educational technology company, offering a holistic learning platform designed for students of all ages and educational levels. Our platform provides learning support for a wide range of subjects, including STEM, Social Sciences, and Languages and also helps students to successfully master various tests and exams worldwide, such as GCSE, A Level, SAT, ACT, Abitur, and more. We offer an extensive library of learning materials, including interactive flashcards, comprehensive textbook solutions, and detailed explanations. The cutting-edge technology and tools we provide help students create their own learning materials. StudySmarter’s content is not only expert-verified but also regularly updated to ensure accuracy and relevance.

##### StudySmarter Editorial Team

• Checked by StudySmarter Editorial Team