Definition and Explanation:
“Profit volume chart is a straightforward relationship of profits to sales level”. Break even chart does not directly show the amount of profit. It has to be determined by measuring the vertical distance between the sales and total cost lines. Profit-volume chart is another form of graph used in management accounting to know about business profit level.
Preparation Method and Procedure:
(1) Horizontal axis is used to represent sales in volume or value.
(2) Vertical axis is used to show profits or losses for different output levels.
(3) The area above the horizontal axis indicates ‘profit area’ whereas the area below the horizontal axis indicates ‘loss area’.
(4) Separate lines for sales, variable and fixed costs do not appear on the profit volume chart, instead a single line showing profits at various activity levels.
(5) The maximum loss occurs at zero output level and is equal to total fixed costs. This is the starting point of the profit line.
(6) Profits or losses at different output levels are plotted against corresponding sale levels. These plotted points are then joined by a straight line (called profit line) and is extended both ways.
(7) The point where profit line intersects sales line, is break even point.
(8) The difference between prevailing sales and the break-even sales represents margin of safety.