Break-even chart

3 key takeaways

• A break-even chart visually displays the break-even point where total revenues equal total costs.
• It helps businesses understand the impact of sales volume on profitability.
• The chart includes key components such as fixed costs, variable costs, total costs, and total revenue.

What is a break-even chart?

A break-even chart is a graphical tool used in financial planning and analysis to show the point at which a business’s revenues match its costs, resulting in no profit or loss. This chart helps businesses visualize how changes in sales volume affect profitability and identify the minimum sales needed to cover costs.

Key components of a break-even chart

1. Fixed costs line: A horizontal line representing fixed costs, which do not change with the level of production or sales.
2. Variable costs line: A line that starts at the origin (0,0) and slopes upward, representing variable costs that increase with the level of production or sales.
3. Total costs line: A line that starts at the level of fixed costs and slopes upward, representing the sum of fixed and variable costs.
4. Total revenue line: A line that starts at the origin and slopes upward, representing revenue generated from sales at different levels of output.
5. Break-even point: The point where the total revenue line intersects the total costs line, indicating the sales volume at which total revenues equal total costs.

How to create a break-even chart

1. Determine fixed costs: Identify all fixed costs, such as rent, salaries, and insurance.
2. Calculate variable costs per unit: Determine the variable cost associated with producing one unit of the product.
3. Identify the selling price per unit: Determine the price at which each unit will be sold.
4. Calculate total costs: For each level of output, calculate total costs by adding fixed costs to total variable costs (variable cost per unit multiplied by the number of units).
5. Calculate total revenue: For each level of output, calculate total revenue by multiplying the selling price per unit by the number of units.
6. Plot the data: Create a graph with the number of units on the horizontal axis and costs/revenue on the vertical axis. Plot the fixed costs line, variable costs line, total costs line, and total revenue line.
7. Identify the break-even point: Locate the point where the total revenue line intersects the total costs line.

Example of a break-even chart

Scenario: A company produces and sells widgets. The fixed costs are $20,000, the variable cost per widget is $5, and the selling price per widget is $15.

Calculations:

• Fixed costs: $20,000
• Variable cost per unit: $5
• Selling price per unit: $15
• Contribution margin per unit: $15 – $5 = $10

Break-even point: $20,000 / $10 = 2,000 units

Data for plotting:

Plotting the break-even chart:

1. Fixed costs line: A horizontal line at $20,000.
2. Total variable costs line: Starting at the origin and rising with the number of units sold.
3. Total costs line: Starting at $20,000 and rising, representing the sum of fixed and variable costs.
4. Total revenue line: Starting at the origin and rising with the number of units sold at $15 per unit.

Break-even point:

• Units sold: 2,000 units
• Total revenue at break-even: $30,000
• Total costs at break-even: $30,000

Importance of a break-even chart

• Visualization: Provides a clear visual representation of costs, revenue, and the break-even point, making it easier to understand the relationship between these elements.
• Decision-making: Helps businesses make informed decisions about pricing, production levels, and cost management.
• Financial planning: Assists in setting sales targets and evaluating the financial viability of new products or business ventures.

Real-world application

Example: A small business owner wants to understand the financial impact of producing a new product.

Fixed costs: $10,000 (rent, salaries, utilities)
Variable cost per unit: $8 (materials, labor)
Selling price per unit: $20

Break-even point: $10,000 / ($20 – $8) = 833 units

Chart plotting: The owner plots the fixed costs, total variable costs, total costs, and total revenue on a graph to visualize the break-even point at 833 units.

Related Topics

• Break-even analysis: Learn about the calculations and concepts behind determining the break-even point.
• Cost-volume-profit (CVP) analysis: Understand the analysis that explores the relationship between costs, sales volume, and profit.
• Fixed and variable costs: Explore the differences between fixed and variable costs and their impact on business operations.
• Profitability analysis: Discover methods for assessing the profitability of products, services, and business ventures.

A break-even chart is a powerful tool for visualizing the financial dynamics of a business, helping to identify the minimum sales needed to cover costs and achieve profitability. By understanding and utilizing break-even charts, businesses can make more informed financial decisions and strategies.