Break Even Analysis Chart

As you might already know, break-even is a level of output at which revenues from sales equal total costs. It is the number of units a firm has to produce and sell to recover its total costs. To conduct the break-even analysis, we can either use a formula or a chart. Now, let's have a look at break-even analysis charts.

What is a break-even chart?

The break-even chart is a method of carrying out a break-even analysis.

The break-even chart includes four variables: fixed costs, variable costs, total costs, and revenue. Each of them is represented as a line that indicates its value depending on the level of output.

Table 1 - Types of Costs Definitions and Examples

How to draw a break-even analysis chart?

Drawing a break-even chart consists of six steps:

1. Draw axes.

2. Draw a line indicating fixed costs.

3. Draw a line indicating variable costs.

4. Draw a line indicating total costs.

5. Draw a line indicating revenue.

6. Mark the break-even point.

Step 1: Draw axes

First, we need to draw two axes:

• Vertical axis - this one will display costs.

• Horizontal axis - this one will display quantity.

Fig. 1 - Break-Even Chart Step 1

Figure 1 illustrates the two axes in the break-even chart (cost and quantity).

Step 2: Draw a line indicating fixed costs

Now we need to draw a line indicating fixed costs. Since fixed costs remain the same (in the short term), regardless of the number of units produced, this line will be horizontal and parallel to the axis that displays quantity.

Fig. 2 - Break-Even Chart Step 2

Figure 2 illustrates a horizontal line indicating fixed costs (FC) which are constant. Depending on its value, the line can be lower or higher on the chart.

Step 3: Draw a line indicating variable costs

Now we need to draw a line indicating variable costs. Since variable costs rise and fall in direct proportion to the number of units, the line will start at the intersection point of the axes and gradually increase.

Figure 3 illustrates a line indicating variable costs (VC). Depending on its value, the line can have a more vertical or horizontal inclination.

Step 4: Draw a line indicating total costs

Now we need to draw a line indicating total costs. Since total costs include both fixed and variable costs, the line will start at the intersection point of the cost axis and the line indicating fixed costs, and will gradually increase.

Fig. 4 - Break Even Analysis Chart Step 4

Figure 4 illustrates a line indicating total costs (TC). Depending on its value, the line can have a more vertical or horizontal inclination.

Step 5: Draw a line indicating revenue

Now we need to draw a line indicating revenue. Since revenue is directly related to quantity, the line will start at the intersection point of the horizontal and vertical axes and increase gradually.

Fig. 5 - Break Even Chart Step 5

Figure 5 illustrates a line indicating revenue (R). Depending on its value, the line can have a more vertical or horizontal inclination.

Step 6: Mark the break-even point

Now we need to mark the break-even point. The break-even point is the intersection point of the total costs and revenues lines.

Fig. 6 - Break Even Chart Step 6

Figure 6 illustrates the break-even point (🔴). The break-even point is the quantity (number of units) at a level where total costs and revenue intersect.

Advantages and disadvantages of a break-even chart

Below you will find some advantages and disadvantages of using the break-even chart as a method to carry out the break-even analysis.

Break-Even Analysis Chart: Advantages

• It is relatively easy to draw.

• It not only shows the number of units a firm has to produce and sell to recover its total costs but also revenues and costs at different levels of production.

• It allows for businesses to see the interdependence between fixed, variable and total costs, revenue, and quantity of units.

Break-Even Analysis Chart: Disadvantages

• It can be more time-consuming to draw a chart than to simply calculate break-even levels of output.

• A poorly drawn chart can give inaccurate results.

As you can see, to conduct the break-even analysis, we do not necessarily have to calculate it. Instead, we can draw a break-even chart. This is an easy alternative that allows us to see revenues and costs at different levels of production and the interdependence between fixed, variable, and total costs, as well as revenue and quantity of units produced.