Explanation of the Concept of Break Even Analysis with Diagram:
Break even chart may be prepared in different forms and styles; but they all in addition to break-even point indicate revenues, costs, profits or losses on different output levels. Usually a break-even chart is prepared in the following form diagram:
Preparation Method, Procedure and Explanation of the Break-Even Chart:
(1) It is customary to use the horizontal axis for units of output and vertical axis for monetary values like sales, revenue and total costs.
(2) Sales revenue line makes an angle of 45o and start from (0,0).
(3) As fixed costs remain the same at all output levels so fixed cost line is drawn across the chart as a straight line parallel to the horizontal axis.
(4) The variable cost lines commences on the vertical axis from the same point where fixed cost line intersects the vertical axis. This is to show total cost on the chart.
(5) On the chart, break even point represents the point at which total cost and total revenue lines cross each other.
(6) The break-even point so determined tells the reader that the break-even point in terms of units of output on the horizontal axis and in terms of sales revenue and total costs on the vertical axis.
(7) Shaded area below the break-even point indicates losses, whereas shaded area above the break-even point indicates profits.
(8) Profit and loss on break even chart may be determined by looking at the vertical distance between the sales revenue and total cost line.
(9) The difference between the prevailing sales and the break even sales represents margin of safety, both in terms of sales revenue and output level.
(10) If break even point appears well over the right side of the chart then it would imply too high total fixed costs or low contribution. This will result in lower margin of safety.
(11) If the break even point over to the left side of the chart coupled with a large angle of incidence then it would imply either lower total fixed costs or high contribution.