Break Even Chart Flashcards
Step 1: Axis
- Draw your axes adding labels ‘Cost/sales’ on the vertical axis and ‘Output’ on the horizontal axis
Step 2: Fixed Costs
- Draw your fixed cost line
This stays the same regardless of output and is therefore a horizontal straight line
Step 3: Variable Costs
- Draw your variable cost line
Variable cost line slopes upwards from 0
This is because as output increases variable costs will increase
E.g. at 0 output variable costs will be £0
Step 4: Total Cost Line
- Draw your total cost line
It starts at the fixed cost point and slopes up upwards - it is parallel with the variable cost line
This is because total costs are fixed costs plus variable costs
Step 5: Total Revenue Line
- Draw your total revenue line
Slopes upwards from 0
This is because as sales increase total revenue will increase
E.g. if no units are sold total revenue will be £0
Step 6: Break Even Point
- Identify break even point
This is where the total cost line crosses the total revenue line
Draw a line downwards to the x axis
Read off the break-even level of output
Break Even Level Of Output
This is where the business is making neither a profit nor a loss
If the business sells less than the break-even level of output it is making a loss
For every item sold above the break-even level it is making a profit
Identifying Loss On The Chart
This is the space between costs and revenue below the break-even point
Identifying Profit On The Chart
This is the space between costs and revenue above the break-even point
Identifying The Break Even Point On The Chart
Where the total cost and revenue lines cross
Identifying The Margin Of Safety On The Chart
The amount by which the sales would have to fall before the break even
Margin Of Safety
The amount of sales that are above the break-even point
The amount of sales a company can lose before it actually starts to lose money or stops making a profit
‘Safety Net’ to make a profit
Margin Of Safety Formula
Margin Of Safety = Actual Sales - Break Even Level Of Output
