ACCA PM Syllabus C. Decision-making Techniques - Break-Even Charts and Profit Volume - Notes ^{5 / 6}

A basic breakeven chart records:

- costs and revenues on the vertical axis (y) 
- units sold on the horizontal axis (x).

Lines are drawn on the chart to represent costs and sales revenue.

The breakeven point is where the total revenues line and the total costs line intersect.

After the breakeven of point has been reached, then we are in the margin of safety.

The contribution breakeven chart

One of the problems with the basic breakeven chart is that it is not possible to read contribution.

A contribution breakeven chart is based on the same principles, but it shows the variable cost line instead of the fixed cost line. 

The same lines for total cost and sales revenue are shown so the breakeven point, and profit can be read off in the same way as with a basic B/E chart. 

However, it is also possible also to read the contribution for any level of activity.

Profit-volume chart

The profit-volume graph focuses purely on showing a profit/ loss line and doesn’t separately show the cost and revenue lines.

The break-even point of the product is the point where the line cuts the x axis, as the line crosses the x axis, profit will be made.

Multi-product

In a multi-product environment, it is common to actually show two lines on the graph: 

one straight line, where a constant mix between the products is assumed; and 
one bow-shaped line, where it is assumed that the company sells its most profitable product first and then its next most profitable product, and so on. 

In order to draw the graph, it is therefore necessary to work out the C/S ratio of each product being sold before ranking the products in order of profitability.

It can be observed from the graph that, when the company sells its most profitable product first (x) it breaks even earlier than when it sells products in a constant mix.

The break-even point is the point where each line cuts the x axis.