CVP analysis can also be presented graphically. Illustration below shows break-even point for Friends Corporation for a single product.
Illustration 1: Graphical representation of a break-even point and break-even analysis
In the above graph of break-even point representation, sales and costs
are shown on the vertical axis (Y) and units sold are shown on the horizontal
axis (X). Fixed costs line starts at
$10,000 for zero units sold and remains unchanged regardless of increases in
units sold. This happens because fixed
costs don't change with production level. Sales line starts at zero dollars when zero units are sold and increases
as more and more units are sold. The
exact increase is $5 per each additional unit because sales price for one valve
is $5. Total costs line starts at
$10,000 for zero units sold because at that level, only fixed costs of $10,000
are incurred. As the company starts
selling valves, the total costs increase by $3 for each additional unit because
variable cost is $3 per unit.
The break-even point is where total costs equal sales. Recall a break-even is no profit situation,
which occurs when sales equal costs. You can see that the break-even point for
Friends Corporation is 5,000 units or $25,000 in sales.
At any point below the break-even mark, the company will have a loss
because total costs exceed sales. Vise
versa, at points above the break-even mark, the company will have a profit
because total costs are lower than sales. The loss and profit areas are shown on the graph in red and green
colors, respectively.
