Break-Even Analysis - how to with a video and worksheet

This post will focus in on how to illustrate a break even chart by drawing a graph.

Essentially you need to be able to draw just 3 lines, and need 2 points of data for each line, so with 6 pieces of information, you can draw out your chart, and then use that to identify the B/E output, the margin of safety and the profit at forecast output. If you can't remember the formula or hate learning them, try this method to see if you can draw the lines and do it from the graph.

The 3 lines you need are:

Total Revenue (TR) - I would draw this one first, as the TR at forecast output would show you how big you need to make both axes on your chart.

-> Calculate TR (Selling price x output) for (1) zero units (it's always €0) and (2) forecast output (multiply selling price x forecast)

Fixed Costs (FC) - These are costs that remain the same even if output changes like Rent. It is always a flat line as it doesn't change.

-> Calculate Fixed Costs - It is given in the question and you draw it at zero units and forecast output, so is a straight line across.

Total Costs (TC) - TC is made up of variable costs (costs that increase as output increases as you use more of them like wages/raw materials) and FC (e.g. Rent).

-> Calculate Total Costs - Your first point is always at zero output and is always where you started drawing your FC line from. Then you need to calculate TC at forecast output, so you add your fixed cost to your variable cost at forecast output - to find variable cost, you multiply VC per unit x forecast output.

Watch the video and use this worksheet as you watch to help you understand it better and practise one!

For more solutions and questions, click here and here!

Let me know any questions!

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