A cost volume profit analysis chart (often called a break even chart), is a useful tool for businesses for two main reasons. First, it's a simple line graph that almost anyone can understand within seconds: the break even point is clearly marked, and allows a business to see where it will begin to make a profit. Second, it focuses on those factors that are most important in business—namely: fixed costs, variable costs, and total costs.
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Things you need
- Graph paper
Draw an x-y axis on your graph paper. An x,y axis is shaped like a letter "L," with one horizontal line (the x-axis), and one vertical line at the left hand side (the y-axis). Coordinates on an x,y axis are represented by two numbers to represent the x and y (for example, (1,8)).
Label the vertical axis "Total Dollars." Write the range of numbers on the y-axis. The range of numbers will depend on your total costs. For example, for a businesses sales of 1-200 books that cost £6 each with fixed costs of £26, and variable cost per unit of £3, a reasonable range for the y-axis would be £0-$2000 (because the highest point on the chart will be revenue of 200 books@$10).
Label the horizontal axis with "Number of items sold." In our example, we are building a chart for 0-200 books, so label the x-axis from 0-200.
Draw the fixed cost line on your chart. For the above example, a horizontal line at £26 represents the fixed costs, so draw a straight line from (0,40) to (200,40).
Draw a line for the variable costs. The variable cost per unit in our example is £3, so draw a straight line starting at (1,6) and ending at (200,1200).
Add the variable costs to the fixed costs to find the total costs. For the above example, draw a line from (0,80) to (200,1240) to represent fixed costs.
Add a revenue line to your chart. For our example, revenue is £6 per book, so draw a line from (0,0) to (200,2000).
Tips and warnings
- For a more dynamic chart, try using a spreadsheet software like Open Office or Excel.