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Handout
Breakeven (or Cost Volume Profit CVP) Charts
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Breakeven (or Cost Volume Profit CVP) Charts
BREAKEVEN
Break-even point BEP is the amount of sales {either sales units
( i.e. the quantity of sales) or the
sales revenue} that an organisation must achieve to make zero
profit or loss
Breakeven therefore will be in two parts,
(1) Either in finding the sale quantity that an organisation
need to achieve to make zero profit
(2) Finding the sales revenue that organisation needs to achieve
to make zero profit
CVP DIAGRAMS (CHARTS)
The three main CVP charts in our studies are:
Breakeven chart Contribution chart Profit volume chart
In the CVP charts it is important to know the variables that are
represented on the Y-axis, or thedependent variable, since it will
be a sad mistake to do in using CVP charts without knowingwhich
variables are dependent variables and which variables are
independent variables (X- axis)
Note that in a CVP chart, the independent variable (X- axis) is
where we always label as thenumber of units or the level of
activity.
The Y-axis for each CVP chart is different and it is important
to know which variables are used tolabel the Y-axis for each of the
different CVP charts.
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The labelling of the Y-axis for each of the CVP charts is as
follows:
Breakeven charto Total sales revenue (TR)o Total Cost (TC)o
Total Fixed Cost (FC)
Contribution charto Total sales revenue (TR)o Total Cost (TC)o
Total Variable Cost (VC)
Profit volume charto Profito Loss
BREAKEVEN CHART
Total revenue TR
Total costTC
Total fixed cost
BEP
FC
BEP Budgeted sales
Level of activity
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CONTRIBUTION CHART
This chart is similar to the breakeven chart but the
contribution chart shows sales revenue, totalcost and variable
cost.
TRTotal revenue
Total cost TC
Total variable cost
BEP
VC
Margin of safety
BEP Budgeted Sales
Level of activity
PROFIT /VOLUME CHARTThis is perhaps one of the most important
and useful graphs. What it does is to show the profit ateach level
of production and sales.
Steps to drawing Profit/Volume Chart1. Calculate total
contribution at various production levels.2. Subtract fixed cost to
get total profit at each point.
N.B. From the graph, we can read off the exact amount of profit
or loss that the company willmake, if it sells that many units.
Profit / Loss = Y-axisVolume = X-axis = Number of units.
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Profit/Volume Chart
`Profit Contribution
Loss
Budgeted fixed cost
Loss
Benefits or the reason for break-even analysis
Breakeven analysis is a useful technique for managers since it
can provide managers with simple and quick estimates.
It is also useful for: Planning Decision-making Controls
Motivation of employees
LIMITATIONS OF CVP ANALYSIS
It can only apply to single product or single mix of a group of
products.
A breakeven chart may be time consuming to prepare
It assumes fixed costs are constant at all levels of output
It assumes that variable costs are the same per unit at all
levels of output
It assumes that sales prices are constant at all levels of
output
It assumes production and sales are the same (stock levels are
ignored)
It ignores the uncertainty in the estimates of fixed costs and
variable cost per unit.
