Question 4 (d)

The break-even chart and its uses

3 marks

Time to write: About 6 minutes
Topic: Cost-volume-profit analysis

Question

Question 4 (d) · 3 marks

What is meant by a break - even chart? Explain the uses of it.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

6 minfor 3 marks

Read from the question

What is meant…?Explain…2 asks, each with its own marks below. Answer both.

Write it in this order

1 Meaning and construction 1½ marks 3 min
2 Uses 1½ marks 3 min

Easy marks

Step 1 opens with the meaning: a one-line definition, the quickest mark in it.

Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks.

Try it first. About 6 minutes for 3 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Meaning of a break-even chart

A break-even chart is a graph showing the relationship between cost, volume and profit. Volume of output or sales is measured on the horizontal axis and cost and revenue on the vertical axis. Three lines are drawn: the fixed cost line (horizontal), the total cost line (starting where the fixed cost line meets the vertical axis and rising with variable cost), and the sales line (starting at the origin). The point where the sales line cuts the total cost line is the break-even point; the area below it to the left is the loss area and the area between the lines beyond it is the profit area. The distance between actual sales and the break-even point is the margin of safety, and the angle between the two lines at break-even is the angle of incidence.

Uses of a break-even chart

Shows the break-even point and the margin of safety at a glance.
Shows profit or loss at any level of activity.
Helps study the effect of changes in selling price, variable cost and fixed cost on profit.
Helps in planning sales volume needed for a target profit.
Helps compare products, plants or alternative methods of production.
Presents cost-volume-profit information simply to managers who are not accountants.

Its limitations, straight-line costs and revenue, a constant product mix, must be kept in mind.

Where the 3 marks sit

#	Component	Marks
1	Meaning and construction	1.5
2	Uses	1.5
	Total	3

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