Breakeven chart definition
/What is a Breakeven Chart?
A breakeven chart is a chart that shows the sales volume level at which total costs equal sales. Losses will be incurred below this point, and profits will be earned above this point. The chart plots revenue, fixed costs, and variable costs on the vertical axis, and volume on the horizontal axis. The chart is useful for portraying the ability of a business to earn a profit with its existing cost structure. The reader can see the unit volume sales level needed to achieve break even, and then needs to decide whether it is possible to reach this sales level. A sample of this chart appears in the following exhibit.
At a more sophisticated level, a breakeven chart can incorporate step costs, where additional costs are added when certain volume levels are reached. For example, adding a new shift may be required once unit volumes exceed 10,000 units. If these step costs are significant, it is possible that profits are maximized at the unit volume level just prior to where these additional costs are incurred.
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Key Components of a Breakeven Chart
A breakeven chart typically includes several key components, each playing a specific role in illustrating the financial dynamics of a business. These components are as follows:
The horizontal axis (x-axis) represents the number of units sold or level of output. It shows how many products need to be sold at varying levels to cover costs and generate profit. The vertical axis (y-axis) shows the amount of money, typically in dollars, representing both costs and revenue.
The total cost line begins at the level of fixed costs on the vertical axis and slopes upward as variable costs are added with each additional unit sold. This line illustrates how total costs increase with production volume. Since fixed costs remain the same regardless of output, the total cost line starts above zero and includes both fixed and variable costs.
The total revenue line starts at the origin (0,0) and slopes upward, indicating that revenue increases directly with each unit sold. This line assumes that the selling price per unit remains constant. Where the total revenue line intersects the total cost line is known as the breakeven point, the critical point where total revenue equals total costs.
To the left of the breakeven point, the business operates at a loss because costs exceed revenues. To the right of the breakeven point, the business starts generating profit, as revenues surpass costs. The area between the total cost and total revenue lines beyond the breakeven point visually represents the amount of profit earned at different levels of output.
Additionally, the chart often includes a fixed cost line, which is a horizontal line showing the constant cost level regardless of production. This helps to clearly differentiate between fixed and variable components of the total cost line. Altogether, these components allow businesses to assess how changes in output affect profitability and to plan for the volume of sales needed to cover expenses.