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Break-Even - Coggle Diagram
Break-Even
Interpreting Break-Even
Break-Even charts also serve useful planning purposes; being able to read the profit and loss of a business at any given level can help a business plan for success or failure.
The chart can also allow predictions, indicating would would happen if; selling price as reduced or increased, variable costs reduces or increases or the fixed costs change.
IF: Variable costs increase > total costs line will need to be redrawn > up > moves BE point up.
IF: Variable costs decrease > total costs line will need to be redrawn > down > moves BE point down.
IF: Fixed costs increase > fixed and total costs line will need to be redrawn > up > moves BE point up.
IF: Fixed costs decrease > fixed and total costs line will need to be redrawn > down > moves BE point down.
IF: Selling price increases > total revenue line will need to be redrawn > causing the BE point to go down.
IF: Selling price decreases > total revenue line will need to be redrawn > causing the BE point to go up.
Limitations
The whole analysis relies on simplifing assumptions, vsriable costs are assumed to increase constantly, breakeven assumes that the firms sell all its outputs in the same time period and selling the products at the same price, these could all well be untrue.
A multi-product firm can calculate the break-even point for each individual product, however this could force them to pay out more by splitting the overheads.
Break-even is a static model - not suited to show effects of changing external variables such as consumer tastes or the economy.
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Charts
A breakeven chart shows costs, revenues and therefore profit at any possible level of output for a business.
Margin of Safety
The horizontal distance between the actual output of the business and the break even level of output ( where the lines meet ). This shows how far demand can fall before the firm slips into a loss making position and can be a vital figure to look out for during difficult periods.
Break-even describes a position where a business is selling just enough to cover its costs without making a profit. Knowing the break-even point is useful to managers of a business as it allows them to have a minimum target of sales to aim for to ensure they aren't making a loss.