Break Even Analysis Chart

10 Key excerpts on "Break Even Analysis Chart"

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  eBook - ePub

  Management Accounting for Hotels and Restaurants

  • Richard Kotas(Author)
  • 2014(Publication Date)
  • Taylor & Francis

    (Publisher)

  5

  Break-Even Analysis

   

  Introduction

  A simple break-even chart has already been illustrated. The purpose of the present chapter is to describe different kinds of break-even charts and show their applications to a variety of different situations.

  The term ‘break-even chart’ is rather unfortunate in that it focuses attention on one particular aspect of what is, in fact, a complex set of sales—cost—profit relationships. The principal aim of the break-even chart is not merely to ascertain the actual or potential break-even point, but also to show what net profit or loss will obtain over the whole range of activity, at what rate net profit will accrue when sales increase above the break-even point, the degree of profit stability of the business, etc.

  One of the main objectives of the break-even charts is to show, preferably in simple terms and without excessive detail, the total sales—cost—profit picture of the business. If it is to achieve this objective, it must be presented as an elegant, well thought-out document and create the right kind of visual impression. It is, consequently, better for the break-even chart to show only the essential data; other information may be given in appropriate schedules, profitability statements and similar documents.

  Basic break-even chart

  The basic break-even chart is the starting point for a more detailed consideration of break-even analysis. Let us therefore take a simple example, construct a basic break-even chart and then look at some of its main features.

  Figure 5.1 Basic break-even chart

  It is assumed that a business has up to 10,000 customers per month and that its ASP is £10.00. Monthly fixed costs are £40,000 and variable costs are incurred at the rate of 40 per cent in relation to the volume of sales. The break-even chart for this operation would appear as shown in Figure 5.1 . The information disclosed by the break-even chart is as follows.

  Break-even point

  This is reached when the number of covers is over 6,500. As explained in the previous chapter, the expected break-even point (in terms of the number of covers) may be calculated by dividing fixed costs by the contribution per cover, which in the present example is £6.00. Hence:

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  Production Economics

  Evaluating Costs of Operations in Manufacturing and Service Industries

  • Anoop Desai, Aashi Mital(Authors)
  • 2018(Publication Date)
  • CRC Press

    (Publisher)

  12   Break Even and Benefit Cost Analysis     12.1What Is Break Even Analysis?

  Break even analysis is a very important tool that is commonly used in economic decision making. The essence of break even analysis is that in every business scenario, there will be a situation wherein the total cost incurred in producing a product or offering a service will invariably be offset by the total revenue obtained from selling it. This scenario is referred to as break even. “Breaking even” occurs when the total cost is equal to total revenue implying that neither any profit nor loss is incurred. It can also be used to compare process costing between different alternative processes. Break even analysis is used for a variety of economic evaluations such as:

  • To compare different processes of manufacturing in order to determine the most economical option at various production levels.

  • Once the production run (level) has been determined, it is necessary to establish the minimum selling price of the product. Break even analysis is helpful in this evaluation. If revenue is equal to total production cost, then the minimum selling price of the product will have to be equal to total production cost (which is equal to revenue at break even production levels) divided by the number of units produced (production run).

  • To determine the actual number of units that has to be produced so that total revenue will be equal to total cost. This production run is referred to as break even point.

  It will be obvious from the preceding discussion that in order to use break even analysis, it is essential to be able to correctly evaluate total cost of production. We have already dealt with this concept in previous chapters. In Chapter 2 , we dealt with cost estimation, in Chapter 3 , we dealt with material costing, Chapter 4 considered process costing and overhead costs and capital expenses were dealt with in Chapters 5 and 6

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  Managing Finance

  • D. Crowther(Author)
  • 2007(Publication Date)
  • Routledge

    (Publisher)

  Figure 6.1 .

  Figure 6.1 Break Even Chart

  From this chart it can be seen that up to the level of output b the firm is operating at a loss and for levels of output in excess of b the firm is operating at a profit. This point is known as the break even point – that is the point at which neither a loss nor a profit is being made.

  Point c represents the planned level of activity and at this point the expected profit level is represented by e d. The difference between the planned level of activity and the break even level of activity (i.e. c b) is known as the margin of safety and represents the amount by which actual output may fall short of that planned without a loss being incurred. The margin of safety is expressed as a percentage of sales, and can be expressed either in terms of number of units or in terms of revenue.

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  Agricultural Production Economics in 2 Vols.

  • Kumar, K Nirmal Ravi(Authors)
  • 2021(Publication Date)
  • Daya Publishing House

    (Publisher)

  investment or the entire firm’s operations. As discussed earlier, break-even analysis is a useful tool to study the relationship between fixed costs, variable costs and returns. So, this analysis helps the business manager to plan the volume of production at which price of the product necessarily covers SRATC or fix a price for the product (by using mark-up) over SRATC to achieve profits. As the break-even analysis explains the relationship between cost, production volume and returns in the business, the same can be extended to show, how changes in TFC-SRTVC relationships or commodity prices or revenues will affect profit levels and BEPs. Break-even analysis is most useful when used with partial budgeting or capital budgeting techniques. The major benefit to using break-even analysis is that, it indicates the lowest amount of business activity necessary to prevent losses. If the entrepreneur has to plan and fix the price of the product, he must know how to calculate BEP. The BEP tells the farmer, how much money he needs to invest in the business before it starts earning actual profits. For instance, if the expenses are Rs 1,000 per month and revenue is Rs.1,000 per month, then the farmer is at the BEP in the business. This is where, the business is making enough money to cover the total expenses, but it isn’t making a profit. To increase profits in the business, the farmer must increase the contribution margin unit (say, by decreasing the SRTVC) and this decreases the BEP. BEP analysis provides a dynamic view of the relationships between costs, volume of output and profits. A better understanding of BEP say, if expressed break-even sales as a percentage of actual sales, it helps the entrepreneur to understand when to expect to break even in his business say, in few months or in years. BEP analysis is important for planning and decision making, particularly in the short run.

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  Managerial Accounting

  • Charles E. Davis, Elizabeth Davis(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  Unit 3.1 Breakeven Analysis 3-5 Notice that this formula is just a restatement of the mathematical operations made between Steps (3) and (4). Sometimes it is useful to know the breakeven point in terms of sales dollars rather than units. If we know the breakeven point in units, we can simply multiply it by the sales price per unit: $30 × 40,000 = $1,200,000. Alternatively, we could use the contribu- tion margin ratio and the profit relationships examined on the previous page, as in the following formula: Total fixed expenses ______________________ Contribution margin ratio = Breakeven point in sales dollars $240,000 _ 0.20 = $1,200,000 in sales dollars to break even Breakeven Graphs While calculating a breakeven point is useful, managers are also interested in the profits generated at other sales levels. A breakeven graph illustrates this relationship between sales revenue and expenses, allowing managers to view a range of results at a single glance. Exhibit 3.2 shows Universal’s breakeven graph based on the company’s sales and expense information. Notice that the total sales revenue line intersects the y-axis at $0 and has a slope of $30; for every jersey sold, Universal takes in $30 of revenue. The fixed expense line inter- sects the y-axis at $240,000 and remains constant across all sales volumes. Even if no jerseys were sold, the company would incur fixed expenses of $240,000. The total cost line represents the sum of fixed and variable expenses, so it intersects the y-axis at $240,000 and increases at a rate (slope) of $24 per jersey. The point at which the total sales revenue line and the total expense line intersect is the breakeven point. Any level of sales to the left of the breakeven point represents an operating loss. Any level of sales to the right of the breakeven point rep- resents operating income. One of the activities managers like to engage in is called “what-if” analysis, or sensitivity analysis.

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  Cornerstones of Cost Management

  • Don Hansen, Maryanne Mowen(Authors)
  • 2017(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  What about the equation approach used in determining the break-even point in units? We can use that approach here as well. Recall that the formula for the break-even point in units is as follows: Break-even point in units ¼ Total fi xed costs/(Price Unit variable cost) If we multiply both sides of the above equation by price, the left-hand side will equal sales revenue at break-even. Break-even units × Price ¼ Price ½ Total fixed costs = ð Price Unit variable cost ފ Break-even sales ¼ Total fixed costs × ½ Price = ð Price Unit variable cost ފ Break-even sales ¼ Total fixed costs × ð Price = Contribution margin Þ Break-even sales ¼ Total fixed costs = Contribution margin ratio Just as target income was added to total fi xed costs in determining unit sales, target income is added to total fi xed costs when calculating the sales revenue needed for a tar-get income. Cornerstone 16.3 illustrates the calculation of break-even sales revenue and sales revenue needed to achieve a target pro fi t for Blazin-Boards Company. In general, assuming that fi xed costs remain unchanged, the contribution margin ra-tio can be used to fi nd the pro fi t impact of a change in sales revenue. To obtain the total change in pro fi ts from a change in revenue, simply multiply the contribution margin ra-tio by the change in sales. For example, if sales revenue is $4,000,000 instead of $4,600,000, how will the expected pro fi ts be affected? A decrease in sales revenue of $600,000 will cause a decrease in pro fi ts of $240,000 (0.40 × $600,000). 16.3 The HOW and WHY of Calculating Revenue for Break-Even and for a Target Pro fi t Information: Blazin-Boards Company plans to sell 10,000 snowboards at $400 each in the coming year. Unit variable cost equals $240. Total fi xed costs equal $1,200,000. Why: Companies frequently prefer to express the break-even point in sales revenue. To do that, we recognize that total sales revenue must cover both total fi xed costs and desired operating income.

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  Accounting

  Business Reporting for Decision Making

  • Jacqueline Birt, Keryn Chalmers, Suzanne Maloney, Albie Brooks, David Bond, Judy Oliver(Authors)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  We now calculate break-even for single-product and multi-product entities, and highlight the differences in calculation for each. Break-even analysis is an important tool for entities such as airlines to understand the financial impact of changing cost structures. Pdf_Folio:389 CHAPTER 10 Cost–volume–proft analysis 389 Break-even analysis for a single product or service Break-even analysis for a single product is detailed in illustrative example 10.1. ILLUSTRATIVE EXAMPLE 10.1 Break-even analysis for a single product Natasha Bartholomew, the owner of Advantage Tennis Coaching (ATC), is planning to take a squad of junior players who have reached qualifying standards to the National Tennis Australia Junior Championship. The tournament will be held on the Gold Coast in Queensland. Players will be transported to the tournament in a bus (48-seat capacity) from Brisbane and ATC will engage an additional coach to support them during the tournament. In recognition of being selected for the squad, ATC will award each player a kit bag embossed with the event and their name. Lunches will be provided. Participation charge (parents to pay) $150 per player Nomination fees $25 per player Embossed kit bag $35 per player Lunches and sports drinks $30 per player Support coach $1200 for the event Bus hire from Brisbane to Gold Coast $600 for the event The break-even calculation (in units, or players) can be expressed as: Fixed costs ($) Contribution margin per unit (or player) ($) = x break-even (units or players) where the contribution margin (per unit, or player) is equal to the selling price (participation charge) per player less the variable costs per player. So, for ATC the contribution margin per player is as follows.

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  Managerial Accounting

  The Cornerstone of Business Decision Making

  • Maryanne Mowen, Don Hansen, Dan Heitger, , Maryanne Mowen, Don Hansen, Dan Heitger(Authors)
  • 2017(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  • Units to earn target profit equal total fixed costs plus target profit divided by the contribution margin. • Sales revenue to earn target profit equals total fixed costs plus target profit divided by the contribution margin ratio. LO3. Prepare a cost-volume-profit graph, and explain its meaning. • CVP assumes linear revenue and cost functions, no finished goods ending invento-ries, constant sales mix, and selling prices and fixed and variable costs that are known with certainty. • CVP graphs plot a line for total costs and a line for total sales revenue. The intersec-tion of these two lines is the break-even point in units. LO4. Apply cost-volume-profit analysis in a multiple-product setting. • Multiple-product analysis requires the expected sales mix. • Break-even units for each product will change as the sales mix changes. • Increased sales of high contribution margin products decrease the break-even point. • Increased sales of low contribution margin products increase the break-even point. LO5. Explain the impact of risk, uncertainty, and changing variables on cost-volume-profit analysis. • Uncertainty regarding costs, prices, and sales mix affects the break-even point. • Sensitivity analysis allows managers to vary costs, prices, and sales mix to show various possible break-even points. • Margin of safety shows how far the company’s actual sales and/or units are above or below the break-even point. • Operating leverage is the use of fixed costs to increase the percentage changes in prof-its as sales activity changes. SUMMARY OF IMPORTANT EQUATIONS 1. Unit Contribution Margin = Price – Unit Variable Cost Total Contribution Margin = Sales – Total Variable Cost 2. Operating Income = (Price × Number of Units Sold) – (Variable Cost per Unit × Number of Units Sold) – Total Fixed Cost 3. Break-Even Units = Total Fixed Cost/Unit Contribution Margin 4. Sales Revenue = Price × Units Sold 5. Variable Cost Ratio = Total Variable Cost/Sales 6.

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  Financial Analysis with Microsoft Excel

  • Timothy Mayes(Author)
  • 2020(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  209 L E A R N I N G O B J E C T I V E S : After studying this chapter, you should be able to: LO1 Differentiate between fixed and variable costs. LO2 Calculate operating, cash, and total break-even points, and find the number of units that need to be sold to reach a target level of EBIT. LO3 Define the terms “business risk” and “financial risk,” and describe the origins of each of these risks. LO4 Use Excel to calculate the DOL, DFL, and DCL, and explain the significance of each of these risk measures. LO5 Explain how the DOL, DFL, and DCL are related to the break-even points. Break-Even and Leverage Analysis C H A P T E R 7 In this chapter, we will consider the decisions that managers make regarding the cost structure of the firm. These decisions will, in turn, impact the decisions they make regarding methods of financing the firm’s assets (i.e., its capital structure) and pricing the firm’s products. In general, we will assume that the firm faces two kinds of costs: 1. Variable costs are those costs that are expected to change at the same rate as the firm’s sales. Variable costs are constant per unit, so as more units are sold, the total variable costs rise. Examples of variable costs include sales commis- sions, costs of raw materials, hourly wages, and so on. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CHAPTER 7 Break-Even and Leverage Analysis 210 2. Fixed costs are those costs that are constant regardless of the quantity produced, over some relevant range of production. Total fixed cost per unit will decline as the number of units increases.

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  Managing Sport Finance

  • Robert Wilson(Author)
  • 2011(Publication Date)
  • Routledge

    (Publisher)

  Total revenue = Total costs. Let us have a look at an example so that you can see how this works in practice:

  £
  Revenue	100
  Less
  Variable costs	60
  Equals
  Contribution	40
  Less
  Fixed costs	40
  Equals
  Profit (or loss)	0

  VC 

  (

  6 0

  )

  + FC 

  (

  4 0

  )

  = TC 

  (

  1 00

  )

  ,  TR = 1 00  

  Therefore we have B/E .

  If you have followed this you will see that it also stands that at breakeven contribution = fixed costs.

  Once you have grasped this concept you can calculate breakeven points relatively easily from marginal costing data. Depending on your responsibilities, it is worth mentioning here that the B/E point may be expressed as:

  • the number of items needed to be sold to breakeven, or
  • the total sales required to breakeven.

  Key term Breakeven point The level of activity at which there is neither a profit nor a loss. It may be measured in terms of units of production or sales revenue.

  Establishing the breakeven point in units

  Remember that breakeven occurs when contribution is just enough to cover fixed costs, with nothing left over for profit. So, providing that we know what fixed costs are, the contribution needed for breakeven is known.

  Activity

  Imagine that Kitlocker.com sell pairs of running shoes for £25. The marginal cost per unit (i.e. per pair of shoes) is £15. Remember that marginal cost is another term for variable cost.

  First, what is the contribution per unit?

  £
  Unit price	25
  Less
  Unit variable cost	15
  Equals
  Unit contribution	10

  Now assume that the fixed costs are £3,600 for one month's trading. What is the breakeven point in units needed to be sold?

  Quantity	Unit price	Revenue	% Relationship
  Revenue	360	25	9,000	100
  Less
  Variable cost	15	5,400	60
  Equals
  Contribution	10	3,600	40
  Less
  Fixed cost	3,600
  Equals
  Profit	0

  If you answered 360 units then you are correct. The following steps were probably used to calculate this figure:

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