Break Even Chart

The Breakeven Chart

A breakeven chart is a strategic tool used to plot the financial revenue of a business unit against time or sales to determine the point when sales output is equal to revenue generated. This is recognised as the breakeven point. In its simplest form, the break-even chart is a graphical representation of costs at various levels of activity shown on the same chart as the variation of income (or sales, revenue) with the same variation in activity. The point at which neither profit nor loss is made is known as the "break-even point" .

The information used to determine and analyse the breakeven point includes fixed, variable and total costs and the associated sales revenues. They are defined as:

Fixed Costs Fixed costs are those business costs that are not directly related to the level of production or output. In other words, even if the business has a zero output or high output, the level of fixed costs will remain broadly the same. Examples of fixed costs: - Rent and rates - Depreciation - Research and development - Marketing costs (non- revenue related) - Administration costs

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Variable Costs Variable costs are those costs which vary directly with the level of output. They represent payment output-related inputs such as raw materials, direct labour, fuel and revenue-related costs such as commission. A distinction is often made between "Direct" variable costs and "Indirect" variable costs.

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Semi-Variable Costs While the distinction between fixed and variable costs is a convenient way of categorising business costs, in reality there are some costs which are fixed in nature but which increase when output reaches certain levels. These are largely related to the overall "scale" and/or complexity of the business. For example, when a business has relatively low levels of output or sales, it may not require costs associated with functions such as human resource management or a fully-resourced finance department. However, as the scale of the business grows (e.g. output, number people employed, number and complexity of transactions) then more resources are required. If production rises suddenly then some short-term increase in warehousing and/or transport may be required. In these circumstances, we say that part of the cost is variable and part fixed.

Graphical Presentation

Defining Page:
USP
UVC FC

= Unit Selling Price

= Unit Variable costs = Fixed Costs

= Quantity of output units sold (and manufactured)

Defining Page:
Cont.
OI TR TC USP = Operating Income = Total Revenue = Total Cost = Unit Selling Price

Break-even analysis:
Break-even point
John sells a product for $10 and it cost $5 to produce (UVC) and has fixed cost (FC) of $25,000 per year How much will he need to sell to break-even?

Graphical analysis:
Dollars 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
Total Cost Line

Total Revenue Line

1000 2000 3000 4000 5000 6000 Quantity

Graphical analysis:
Cont.
Dollars 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0

Total Cost Line

Total Revenue Line Break-even point

1000 2000 3000 4000 5000 6000 Quantity

Scenario 1:
Break-even Analysis Simplified
When total revenue is equal to total cost the process is at the break-even point. TC = TR

Why calculate break-even?

Tom can hire an ice-cream van for an afternoon at a summer fete. The van hire will be 100 and the cost of cornets, ice cream etc will 50p per ice cream. Tom thinks a sensible selling price will be 1.50. At this price, how many ice-creams must he sell to cover his costs? Calculating this will help Tom to decide if the idea is worthwhile.

Drawing a break-even chart 1

Tom's ice creams
450 400 350 300 250 200 150 100 50 0 0 100 200 300

Cost/Revenue

Number sold

Drawing a break-even chart 2

Tom's ice creams
450 400 350 300 250 200 150 100 50 0 0 100 200 300

Cost/Revenue

Fixed Cost

Number sold

Drawing a break-even chart 3

Tom's ice creams
450 400 350 300 250 200 150 100 50 0 0 100 200 300

Cost/Revenue

Total Cost Fixed Cost

Number sold

Drawing a break-even chart 4

Tom's ice creams
450 400 350 300 250 200 150 100 50 0 0 100 200 300

Cost/Revenue

Sales Revenue Total Cost Fixed Cost

Number sold

Identifying the break-even point

Tom's ice creams
450 400 350 300 250 200 150 100 50 0 0

Cost/Revenue

Profit
Sales Revenue Total Cost Fixed Cost
Break-even point

Loss

100

200

300

Number sold

Using a formula to calculate the breakeven point The break-even point =

Fixed costs

(Selling price per unit minus variable cost per unit)

IMPORTANT: No need to learn this. The formula is given on the assessment paper if you need it.

Applying the formula

Fixed costs
(Selling price per unit minus variable cost per unit)

Tom:

100 (1.50 50p)

100