You are on page 1of 5

warmah.

com

warmah.com
Handout
Breakeven (or Cost Volume Profit CVP) Charts

Prepared by William Armah

Page 1

warmah.com

Breakeven (or Cost Volume Profit CVP) Charts


BREAKEVEN
Break-even point BEP is the amount of sales {either sales units (i.e. the quantity of sales) or the sales revenue} that an organisation must achieve to make zero profit or loss

Breakeven therefore will be in two parts, (1) Either in finding the sale quantity that an organisation need to achieve to make zero profit (2) Finding the sales revenue that organisation needs to achieve to make zero profit

CVP DIAGRAMS (CHARTS)


The three main CVP charts in our studies are: Breakeven chart Contribution chart Profit volume chart

In the CVP charts it is important to know the variables that are represented on the Y-axis, or the dependent variable, since it will be a sad mistake to do in using CVP charts without knowing which variables are dependent variables and which variables are independent variables (X- axis)

Note that in a CVP chart, the independent variable (X- axis) is where we always label as the number of units or the level of activity.

The Y-axis for each CVP chart is different and it is important to know which variables are used to label the Y-axis for each of the different CVP charts.

Prepared by William Armah

Page 2

warmah.com

The labelling of the Y-axis for each of the CVP charts is as follows: Breakeven chart o Total sales revenue (TR) o Total Cost (TC) o Total Fixed Cost (FC) Contribution chart o Total sales revenue (TR) o Total Cost (TC) o Total Variable Cost (VC) Profit volume chart o Profit o Loss

BREAKEVEN CHART
Total revenue Total cost TR

TC
Total fixed cost

BEP

FC

BEP Level of activity

Budgeted sales

Prepared by William Armah

Page 3

warmah.com CONTRIBUTION CHART


This chart is similar to the breakeven chart but the contribution chart shows sales revenue, total cost and variable cost.

TR
Total revenue Total cost Total variable cost TC

BEP VC

Margin of safety

BEP Level of activity

Budgeted Sales

PROFIT /VOLUME CHART


This is perhaps one of the most important and useful graphs. What it does is to show the profit at each level of production and sales. Steps to drawing Profit/Volume Chart 1. Calculate total contribution at various production levels. 2. Subtract fixed cost to get total profit at each point. N.B. From the graph, we can read off the exact amount of profit or loss that the company will make, if it sells that many units. Profit / Loss = Y-axis Volume = X-axis = Number of units.

Prepared by William Armah

Page 4

warmah.com
Profit/Volume Chart

`Profit

Contribution

Loss Budgeted fixed cost

Loss

Benefits or the reason for break-even analysis


Breakeven analysis is a useful technique for managers since it can provide managers with simple and quick estimates. It is also useful for: Planning Decision-making Controls Motivation of employees

LIMITATIONS OF CVP ANALYSIS


It can only apply to single product or single mix of a group of products. A breakeven chart may be time consuming to prepare It assumes fixed costs are constant at all levels of output It assumes that variable costs are the same per unit at all levels of output It assumes that sales prices are constant at all levels of output It assumes production and sales are the same (stock levels are ignored) It ignores the uncertainty in the estimates of fixed costs and variable cost per unit.

Prepared by William Armah

Page 5

You might also like