StudySmarter - The all-in-one study app.
4.8 • +11k Ratings
More than 3 Million Downloads
Free
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.
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 |
Drawing a break-even chart consists of 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.
First, we need to draw two axes:
Vertical axis - this one will display costs.
Horizontal axis - this one will display quantity.
Figure 1. Break-even chart step 1, StudySmarter
Figure 1 illustrates the two axes in the break-even chart (cost and quantity).
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.
Figure 2. Break-even chart step 2, StudySmarter
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.
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. Break-even chart step 3, StudySmarter
Figure 3 illustrates a line indicating variable costs (VC). Depending on its value, the line can have a more vertical or horizontal inclination.
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.
Figure 4. Break-even chart step 4, StudySmarter
Figure 4 illustrates a line indicating total costs (TC). Depending on its value, the line can have a more vertical or horizontal inclination.
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.
Figure 5. Break-even chart step 5, StudySmarter
Figure 5 illustrates a line indicating revenue (R). Depending on its value, the line can have a more vertical or horizontal inclination.
Now we need to mark the break-even point. The break-even point is the intersection point of the total costs and revenues lines.
Figure 6. Break-even chart step 6, StudySmarter
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.
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?
Figure 7. Break-even chart example, StudySmarter
Figure 7 illustrates the break-even chart for the 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:
This means that company Z has to produce 30 chairs a month to reach the break-even level.
Below you will find some advantages and disadvantages of using the break-even chart as a method to carry out the break-even analysis.
It is relatively easy to draw.
It not only shows the number of units a firm has to produce and sell to recover its total costs but also revenues and costs at different levels of production.
It allows for businesses to see the interdependence between fixed, variable and total costs, revenue, and quantity of units.
It can be more time-consuming to draw a chart than to simply calculate break-even levels of output.
A poorly drawn chart can give inaccurate results.
As you can see, to conduct the break-even analysis, we do not necessarily have to calculate it. Instead, we can draw a break-even chart. This is an easy alternative that allows us to see revenues and costs at different levels of production and the interdependence between fixed, variable, and total costs, as well as revenue and quantity of units produced.
A break-even chart is a method to carry out the break-even analysis. It includes four variables: fixed costs, variable costs, total costs, and revenue. Each of them is presented as a line that indicates their value depending on the level of output.
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, and mark the break-even point.
No, break-even analyses can also be conducted using a calculation. The formula for the break-even level of output is the following:
Break-even = Fixed costs / Contribution per unit
Be perfectly prepared on time with an individual plan.
Test your knowledge with gamified quizzes.
Create and find flashcards in record time.
Create beautiful notes faster than ever before.
Have all your study materials in one place.
Upload unlimited documents and save them online.
Identify your study strength and weaknesses.
Set individual study goals and earn points reaching them.
Stop procrastinating with our study reminders.
Earn points, unlock badges and level up while studying.
Create flashcards in notes completely automatically.
Create the most beautiful study materials using our templates.
Sign up to highlight and take notes. It’s 100% free.