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Breakeven Charts

These are graphs which show how costs and revenues of a business change with a change in sales. They show the level of sales the business must make in order to break even.

Criticism of break even analysis

Fixed cost is represented as a straight line but in actual fixed costs is likely to change at different levels of output. A stepped line may represent fixed cost more accurately.

Important terms

Fixed cost: all costs which do not change with the change in output. Example rent, interest charges.

Variable cost: all costs which change with the change in output. Example materials, fuel and labour cost.

Total cost= fixed cost + variable cost

Revenue: income from sales of goods and services (Quantity sold X Price)


Breakeven point is that level of output where the sales revenue is equal to the total cost. That level of output where there is no profit or loss. If a business is unable to reach this level of output it will suffer a loss from this product. Any output in excess of break even generates profit for the company.

Margin of Safety: The horizontal distance between the breakeven level of output and the current level of output is known as margin of safety.

break even chart

 

Method of plotting Break even chart

  • Calculate fixed cost, total cost and Sales at different levels of output in a table
  • Plot the Sales on X axis, Output on Y axis
  • Plot fixed cost from the table
  • Plot total cost from the table
  • Plot sales from the table
  • The point at which the sales (total revenue TR) line crosses the total cost (TC) line is the breakeven point.
  • Breakeven point can be expressed in Output as well as in Value.

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