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Reading this paper, you will learn about Break Even Chart:
1. Meaning of Break-Even Chart
2. Construction of a Break-Even Chart
3. Method of Preparation
4. Advantages
5. Limitations
6. Multi-Product
7. Types.
Contents:
1. Meaning of Break-Even Chart
2. Construction of a Break-Even Chart
3. Types of Break-Even Chart
4. Method of Preparation of Break-Even Chart
5. Advantages of Break-Even Chart
6. Limitations of Break-Even Chart
7. Multi-Product of Break-Even Chart
(b) Semi-Variable Cost can be bifurcated into variable and fixed components.
(c) Variable cost per unit also will not make any change during the relevant period.
(d) Selling price also will not make any change during the relevant period irrespective of
the quantity sold.
Again, ‘X’ axis may be represented in the following manner, such as:
(1) Volume in units;
Under this type of BEC, the total variable costs, i.e. direct materials, direct labor, variable
overhead are represented in this graph together with the appropriation items, like dividend on
equity shares, dividend on preference shares, income-tax and retentions are plotted. In this
respect it may be mentioned that if this chart contains only the details of appropriation of profit it
may be called profit-appropriations BEC.
Illustration:
From the following particulars, draw up a detailed BEC:
(b) Control Break-Even Chart:
Control Break-Even Chart is prepared in order to make a comparison between
budgeted/standard and actual cost, sales and profits, particularly when the Budgetary Control
Systems and Marginal Costing system are combined. After analyzing the deviations between
budgeted/standard and actual figures.
Control Break-Even Chart proves itself a very useful method which directly helps the
management in taking decisions. It is to be remembered that the detailed information about
deviations between budgeted figures and actual figures is not possible graphically.
(ii) Fixed Cost which do not require immediate cost (like, deferred expenditure, Depreciation
etc.).
(ii) Is shown last i.e., after variable cost, so that a comparison can be made easily.
Similarly, variable costs which need immediate payment, are plotted as usual. But care should
be taken if any credit transaction is included in the variable cost.
If that be so the’ same is to be treated as no. (ii) stated above. This Chart is very useful to those
firms which suffer from short-term liquidity and solvency position as well. It is primarily used in
cash flow analysis.
Illustration:
From the following information prepare a Cash-Break-Even Chart:
Solution:
This can be solved with the help of a BEC which is shown below. In this regard, it may be said
that if amount of sales and costs at different stages are plotted on a graph paper, it becomes
possible for us to know at which point the profit will be maximized. Needless to mention that that
point will be the optimum level and that selling price of the products will be the optimum selling
price of the products of the firm.
All this information can be had with the help of a BEC which is presented below:
Illustration:
X Ltd. gives you the following particulars for which you are requested to ascertain the volume of
sales and selling price at which the company can maximize profits with the help of a graph.
The fixed costs amount to Rs. 24,000 and the same is to increase by Rs. 8,000 if the output
exceeds 4,000 units.
Solution:
Before preparing the graph the following table is prepared:
Now taking the above data, we can plot the same on s graph which is depicted as under:
From the above, it becomes clear that at 6,500 units, the profit can be maximised In other
words, at this level the sales value/line is higher than the total cost line resulting the highest
margin. As such, this will be the optimum level of output at the prevailing selling price which will
yield the maximum profit.
(b) At the same time, ascertain sales value at various activity level and plot them on the graph
paper and then to zero which line indicates the volume of sales.
(c) It is interesting to note that where the sales line intersects the total cost line, that is known as
Break-Even point. Needless to mention here that BEP will be ascertained by drawing a
perpendicular to ‘X’ axis from the point of intersection which measures the horizontal distance
from the zero point from where the perpendicular is drawn.
Similarly, in order to find out BES value, another perpendicular to the ‘Y’ axis from the point of
intersection is drawn.
Comments:
From the above BEC, it becomes clear that profit/loss at different levels of activity can be
understood from this chart. For example, if we find the sales line is above the total cost line,
there will be profit and vice-versa. Similarly, if total cost is equal to total sales, there is no profit
or no loss i.e., break-even point. In Fig. 4.2 diagram, 50% level of activity brings break-even
level.
(iii) To substitute the less profitable product by more profitable products, and
(b) Production and sales are equal (i.e., without considering value of stock);
(d) All indirect cost can be segregated into fixed and variable. In actual practice, however,
all the above assumptions are not correct
(b) Y axis represents contribution and fixed cost while X axis represents sales value;
(d) And then take the product which has highest P/V ratio, plot its contribution against
sales and so on;
(e) Now, get the average contribution line after joining the origin to the end of the last line
so plotted.
(f) The BEP will be that point where average contribution will cut fixed cost line of the
products.
Illustration:
X Ltd products three types of products, viz. A, B and C.
Construct a BEC in order to determine their BEP from the following particulars:
Solution:
Before constructing the BEC, let us calculate the P/V ratio of each product first. Then according
to the importance of P/V ratio,a table showing cumulative sales should also be prepared. At last,
complete the graph.
Now we are to prepare the following table:
The same result can also be depicted by the following Multi-Product Break-Even Chart
(BEC) as under: