CIMA BA2 Syllabus D. DECISION MAKING - Break Even Charts - Notes ^{2 / 4}

A basic breakeven chart records:

- costs and revenues on the vertical axis (y) 
- the level of activity on the horizontal axis (x).

Lines are drawn on the chart to represent costs and sales revenue.

The breakeven point is where the total revenues line and the total costs line intersect.

After the breakeven of point has been reached, then we are in the margin of safety.

Profit-volume chart

The profit-volume graph focuses purely on showing a profit/ loss line and doesn’t separately show the cost and revenue lines.

The break-even point of the product is the point where the line cuts the x axis, as the line crosses the x axis, profit will be made.

Limitations of Break Even Analysis

1. Products - If there is more than one product, it assumes that sales are in a constant ratio.

   This is not true in the real world

2. Fixed costs are assumed to always be fixed.

   Variable costs are always assumed to stay the same per unit.

   In the real world, suppliers will change their prices.

3. The selling price is assumed to stay the same. 

   In the real world this is not true because of competitors and new entrants into the markets.

4. Inflation has be ignored, interest rates also have been ignored.