Graphical Approach For Cvp Analysis (Break-Even Chart) Worksheet

Graphical Approach For Cvp Analysis (Break-Even Chart) Worksheet - Chapter 3

Chapter 3

| Break-Even and Cost-Volume-Profit Analysis

Graphical Approach for CVP Analysis

17.

3.2

(Break-Even Chart)

A break-even chart is a graphical representation of the following on the same axes:

Fixed costs

2. Total costs at various levels of quantity produced

Total revenue at various levels of quantity sold

The vertical axis (Y-axis) of the graph represents total cost or total revenue (in dollars) and the

horizontal axis (X-axis) of the graph represents quantity of items produced or sold (in number

of units).

These graphs are useful tools in break-even analysis and make it easy to observe how total costs

and total revenue change with the quantity produced and sold. It also makes it easy to see at which

point neither profit is made nor loss is incurred in the business (i.e., break-even point) and the

amount of profit or loss if the quantity produced and sold is known.

Exhibit 3.2: Graph of Total Costs vs. Quantity Produced and Total Revenue vs. Quantity Sold

The quantity produced

As sales increase, net income becomes less negative until it equals zero (NI = 0). At this point, it

and sold above the break-

reaches the break-even point. The intersection point of the two graphs represents the break-even

even volume will result

in a profit for a business

point, where the total revenue and the total costs from the business are equal.

while that below the

break-even volume will

Therefore, sales before the break-even point would result in a negative net income (NI < 0) indicating a

result in a loss.

loss, while sales after the break-even point will result in a positive net income (NI > 0), indicating a profit.

Graphical Approach For Cvp Analysis (Break-Even Chart) Worksheet - Chapter 3