Creating a Breakeven Chart

Creating a Breakeven Chart

A breakeven chart is a visual representation of your business's profitability. It helps you understand the relationship between your sales, costs, and profits at different levels of production. By creating a breakeven chart, you can determine the minimum number of units you need to sell to cover your costs and start making a profit.

Step 1: Gather Your Data

• Fixed Costs: These are costs that remain constant regardless of your production volume, such as rent, salaries, and insurance.
• Variable Costs: These are costs that change directly with your production volume, such as raw materials, direct labor, and shipping.
• Selling Price per Unit: This is the price at which you sell your product or service.

Step 2: Calculate Your Breakeven Point

The breakeven point is the point where your total revenue equals your total costs. To calculate your breakeven point in units, use the following formula:

Breakeven Point (Units) = Fixed Costs / (Selling Price per Unit - Variable Costs per Unit)

Step 3: Create the Chart

1. Label the Axes: Label the horizontal (x) axis as "Units Sold" and the vertical (y) axis as "Costs & Revenue".
2. Plot Your Fixed Costs: Draw a horizontal line representing your fixed costs at the y-axis.
3. Plot Your Total Costs: Draw a diagonal line representing your total costs. This line starts at your fixed cost line and slopes upwards, reflecting your variable costs per unit.
4. Plot Your Total Revenue: Draw a diagonal line representing your total revenue. This line starts at the origin (0,0) and slopes upwards, reflecting your selling price per unit.
5. Identify the Breakeven Point: The point where the total costs line and the total revenue line intersect is your breakeven point.

Step 4: Interpret the Chart

• Left of the Breakeven Point: You are operating at a loss, as your total costs exceed your total revenue.
• Right of the Breakeven Point: You are operating at a profit, as your total revenue exceeds your total costs.

Example

Let's assume you have the following data:

• Fixed Costs: $10,000
• Variable Costs per Unit: $5

• Selling Price per Unit: $10

• Calculate the Breakeven Point: Breakeven Point (Units) = $10,000 / ($10 - $5) = 2,000 units

• Create the Chart:
• Label the axes as described above.
• Plot a horizontal line at $10,000 for your fixed costs.
• Plot a diagonal line starting at $10,000, increasing by $5 for every unit sold (variable cost).
• Plot a diagonal line starting at the origin, increasing by $10 for every unit sold (selling price).
• The point where these lines intersect represents your breakeven point of 2,000 units.

Benefits of Using a Breakeven Chart

• Visual Understanding: It provides a clear picture of your profitability at different sales volumes.
• Decision-Making Tool: It helps you make informed decisions about pricing, production levels, and marketing strategies.
• Risk Assessment: It allows you to assess the potential risks associated with your business.
• Financial Planning: It helps you plan for future financial needs and set realistic goals.

By creating and analyzing a breakeven chart, you can gain valuable insights into your business and make more informed decisions to achieve profitability and success.