Understanding Break-Even Chart: Graphical Cost, Volume, and Profits, Study notes of Construction

Download Understanding Break-Even Chart: Graphical Cost, Volume, and Profits and more Study notes Construction in PDF only on Docsity! Meaning of Break-Even Chart (BEC): The Break-Even Chart is a graphical representation between cost, volume and profits. No doubt it is an important tool which helps to make profit planning. It has been defined as “a chart which shows the profitability or otherwise of an undertaking at various levels of activity and as a result indicates the point at which neither profit nor loss is made.” Construction of a Break-Even Chart: A Break-Even Chart is constructed on a graph paper. Activity or volume of production is plotted on the ‘X’ axis, whereas cost and revenue are plotted on the ‘Y” axis. 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" and is represented on the chart below by the intersection of the two lines: In the diagram above, the line OA represents the variation of income at varying levels of production activity ("output"). OB represents the total fixed costs in the business. As output increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase. At low levels of output, Costs are greater than Income. At the point of intersection, P, costs are exactly equal to income, and hence neither profit nor loss is made. The following illustration will help to understand the whole principle: Method of Preparation: (a) Draw fixed cost of Rs. 40,000 line parallel to ‘X’ axis. Then plot the variable cost line over fixed cost level at various level of activity and join the variable cost line with fixed cost line at zero level of activity which will indicate total cost line—variable cost being over fixed cost line. At the same time, ascertain sales value at various activity level and plot them on the graph paper and then join to zero which line indicates the volume of sales. It is interesting to note that where the sales line intersects the total cost line, that is known as Break-Even Point.