ZIMSEC O Level Business Studies Notes: Business Finance and Accounting: Break even analysis the graphical method example
 As has been pointed out there are two approaches to break even analysis
 In this post we will look at the graphical method
 To help make matters clear we will make extensive use of an example below
Shona runs a takeaway pizza business. She has estimated that she can produce as many as
1000 pizzas per week although she is only selling 700 on average at present. Shona recently
looked again at her costs and prices. These are shown in Table 1.
Direct cost per pizza  $4 
Weekly overheads  $1800 
Selling price per pizza  $7 
Required:
 Give an example of Shona’s:
 Variable Cost
 Fixed Cost
 Draw a weekly break even chart for Shona’s Pizzaria
Solution:
 If this were an example you would only be required to give an example but we have provided a definition and multiple examples for your benefit:
 Variable costs are costs which vary according to the level of production all direct costs are variable costs. For Shona variable costs can come in the form of flour/dough, salt, sugar, toppings etc
 Fixed costs are costs that do not vary with the level of production in the short run for example rent for the Pizzaria, lighting expenses etc
 We will now draw the chart:
 When drawing a break even chart you need to plot the following lines:
 The Total Variable Cost line (VC)
 The Total Fixed Cost line (FC)
 The Total Cost line (TC)
 The Sales Revenue line (SR)
 First you need to determine an appropriate scale for both the x and y axis of your graph
 Drawing graphs/charts is part science part art but there is a logic to it
 Your graph should be as large as possible and cover the alloted space
 To determine the scale for the x (horizontal axis):
 Determine the minimum and maximum values to be shown
 The minimum value is 0 pizzas(units)
 The maximum value is 1000 pizzas(units) this is the maximum level of activity Shona cannot produce more pizzas than this
 Count the number of bold borderlined squares on the graph paper from the left to the right
 Now the scale would be:
 \mathrm{\dfrac{(Maximum \quad ValueMinimum\quad Value)}{Number \quad of\quad Squares}}
 In our example there were 5 squares counting horizontally now in that instance the scale was:
 \mathrm{\dfrac{10000}{5}}
 200
 This means each large square will represent 200 pizzas (units) horizontally
 For the yaxis:
 Obtain the maximum possible value using the formula:
 \mathrm{Selling\quad Price\quad Per\quad Unit\quad x\quad Maximum\quad Activity\quad Level}
 \mathrm{7 x 1000}
 $7000
 If you count the squares in above grid from the bottom to the top you will get 5 and using the above formula you will get
 1400 i.e each large square would represent $1400
 You could go ahead and use this scale but things will be a bit unkempt on the y axis
 A more neat solution would be to use $1000 as the maximum value
 This would yield:
 1000 i.e. each large square would represent $1000
 The next step is to create a table of values:
Output  0  200  400  600  800  1000 
FC  1800  1800  1800  1800  1800  1800 
VC  0  800  1600  2400  3200  4000 
TC  1800  2600  3400  4200  5000  5800 
SR  0  1400  2800  4200  5600  7000 

 If you are wondering how we came up with the output levels to put in the table here is how we did it:
 The fixed costs are fixed so the value does not change
 \mathrm{Total\quad Variable\quad Costs (VC)=4 x Level\quad of\quad Activity}
 \mathrm{Sales\quad Revenue (SR)= 7 x Level\quad of\quad Activity}
 Now that we have a table draw the xaxis and the yaxis
 Plot each line onto the graph
 Join each point using a ruler
 Below is the result

 To avoid clutter we have avoided showing the margin of safety
 It would be shown by drawing a vertical line down through the break even point
 Another line would be drawn down the maximum level of output
 The result is depicted as below:

NB The last graph is for illustration only the solution is shown in the graph above it:

NB An alternative depiction using lighter colors
To learn about Break Even Analysis using formulae instead click here
To access more topics go to the O Level Business Notes
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