Break-even chart shows the relationship between cost and sales and indicates profit and loss on different quantity on the chart for analysis where the horizontal line shows the sales quantity and the vertical line shows the total costs and total revenue and at the intersection point it is breakeven point which indicates no profit and no loss at given quantity.
On the vertical axis, the breakeven chart plots the revenue, variable cost, and the fixed costs of the company and on the horizontal axis, the volume is being plotted. The chart helps in portraying the company’s ability to earn a profit with the present cost structure.
The following example of the break-even chart provides an outline of the most common type of break-even chart present. Each of the examples of the breakeven chart states the topic, relevant reasons, and the additional comments wherever required.
Company Bag Ltd. produces and sells the bags in the market and wants to conduct the break-even analysis of its business. The accountant in charge of the company determined that the fixed cost of the company consisting of salaries of the employees, rent cost, property tax, etc will remain the same at $ 1,000,000. The variable cost which is associated with the production of one unit of the bag will come to $ 20. The bag is sold in the market at a premium price of $ 120. Prepare the break-even chart for Company Bag Ltd.
- Fixed Cost: $ 1,000,000
- Variable Cost: $ 20 per unit
- Sales price: $ 120 per unit
- Contribution per unit = Sales price per unit – Variable cost per unit
- Contribution per unit = $ 120 – $ 20
- Contribution per unit = $ 100
Calculation of break-even quantity can be done as follows:
Break-Even quantity = ($ 1,000,000 / $ 100)
Break-Even Quantity = 10,000 units
It shows that the company Bag Ltd. would be required to sell the 10,000 units of bags in order to achieve the break-even at the given fixed cost, selling price, and the variable cost of the bag.
Graphical Representation of Break-Even Chart
Below is the Break even chart for the above example of bag ltd:
For the presentation of break-even chart total fixed costs, total variable costs, total costs, and the total revenue will be calculated at the particular unit sold as follows
Calculation of Different Costs for Bag Ltd for Different Number of Units Sold
- On the X-axis (horizontal), the number of units is shown and on the Y-axis (vertical), a dollar amount is presented.
- The blue line in the graph represents total fixed costs amounting to $ 1000,000. The line of the fixed costs is straight as the fixed cost remains unchanged irrespective of the number of units sold by the company.
- The green line represents revenue from the products sold. For example, selling 10,000 units of the bag would generate a revenue of $ 1,200,000 (10,000 x $ 120) for the company, and selling of 8,000 units of the bag would generate a revenue of $ 960,000 (8,000 x $120).
- The red line represents the total costs i.e., the sum of the fixed costs and the variable costs. Like in the present case, if a company sells the 0 units, then the variable cost of the company would be $ 0 but the fixed costs will be incurred in that case also so the fixed cost would be $ 1000,000 making the total costs to $ 1000,000. Now if a company sells the 10,000 units, then the variable cost of the company would be $ 200,000 (10,000 x $20) and the fixed costs would be $ 1000,000 making the total costs to $ 1,200,000.
- As calculated above the breakeven point of the company is at the 10,000 units. At breakeven point, revenue of the company would be $ 1,200,000 (10,000 x $ 120), the variable costs would be $ 200,000 (10,000 x 2) and the fixed costs would be $ 1,000,000 making the total cost of $ 1,200,000 ($ 200,000 + $ 1,000,000).
Now, when the number of units sold exceeds the breakeven point of 10,000 units than the company Bag Ltd. would be making profits on the goods sold. As per the chart when the green line of the revenue is greater than the total costs red line after the 10,000 units produced and sold then Bag Ltd. would be making profits on the goods sold. Likewise, in case the number of units sold is below 10,000 units, then the company Bag Ltd. would be in loss. As per the chart, 0-9,999 units produced and sold total costs red line is above the green total revenue line where the company Bag Ltd. would be in loss.
The break-even chart, also known as the Cost volume profit graph, is a graphical representation of the sales units and the dollar sales required for the break-even. On the vertical axis, the chart plots the revenue, variable cost, and the fixed costs of the company and on the horizontal axis, the volume is being plotted.
This has been a guide to Break Even Chart. Here we discuss how to create break-even chart analysis along with practical examples, graphical representation, and calculations. You can learn more about accounting from following articles –