Explain how to use graphical technique to draw a Break-even graph or Cost volume profit graph. What are the assumptions used in constructing the typical break even graph
Part A: how to construct a typical break-even point graph:
The Break-even point can be found by graphing the cost and revenue relationships. The following are the steps to do so:
Draw the axes. The horizontal axis the sales volume and the vertical axis is dollars of cost and revenue.
Plot sales volume. Select a convenient sales volume and plot a point for total sales dollars at that volume. Then draw a line between the origin and the point.
Plot the fixed expenses. It should be a horizontal line intersecting the vertical axis at the level of fixed costs
Plot variable expenses. Determine the variable expenses at some volume level. Add this amount to fixed expenses and plot the point. Then draw a line from the intersection of the vertical axis to this point. This line represents total expenses, and the difference between the fixed expenses line and this new line represents the variable expenses.
Locate the break-even point. The break-even point is where the total expenses line crosses the sales line.
Part B: What are the assumptions used in the construction of a break-even graph:
Assumptions used in constructing the break-even graph :-
- Expenses may be classified into variable and fixed categories
- Behavior of revenues and expenses is accurately portrayed and is linear over the relevant range
- Efficiency and productivity will be unchanged
- Sales mix will be constant. Sales mix is the relative proportions or combinations of quantities of products that constitute total sales
- The difference in inventory level at the beginning and at the end of a period is insignificant.
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