Production Management

Short Notes on Multiple break-even points | Unit Profit Graph

Multiple Break-even Points: When we draw a break-even chart, the fixed costs are shown by a horizontal line parallel to the base line and variable costs are represented by a straight line sloping upward from left to right. But it is an over simplification of facts, if we presume that trends move in this manner only.

This goes to emphasize the point that all variable costs are not always fixed-for all levels of activity and for all times. Both the curves (curve of variable costs and fixed costs) may be nonlinear. Revenue curve also is non-linear in nature. If instead of having two separate curves for available cost and fixed cost we have a total cost curve the point of inter-section of the total revenue would represent the break-even point.

Thus, a situation may arise when in a single product there can be two or more break-even points.

Unit Profit Graph : The break-even analysis explains to us that the unit variable cost remains constant whereas the fixed cost per unit goes on fluctuating depending upon the level of activity. At higher levels of activity the per unit fixed cost will be lesser and lesser as the recovery rate goes down.

At the BEP the unit selling price will be equal to the unit total cost. Beyond the BEP unit total cost will be less than the unit selling price. This is the because unit total cost gets reduced on spreading of fixed cost. Whereas variable cost will remain constant per unit fixed cost will fall. If unit selling price remains constant profit will result.

This can be depicted by a unit profit graph, showing the influence of unit fixed cost on total unit cost.

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