Arnstein, William E.

Mack, Edgar A.

English

eGrove (Univ. of Mississippi)

Management Services: A Magazine of Planning, Systems, and Controls Volume 1 Number 1 Article 12 3-1964 New Approach to the Breakeven Chart William E. Arnstein Edgar A. Mack Follow this and additional works at: https://egrove.olemiss.edu/mgmtservices  Part of the Accounting Commons Recommended Citation Arnstein, William E. and Mack, Edgar A. (1964) "New Approach to the Breakeven Chart," Management Services: A Magazine of Planning, Systems, and Controls: Vol. 1: No. 1, Article 12. Available at: https://egrove.olemiss.edu/mgmtservices/vol1/iss1/12 This Management Information Systems is brought to you for free and open access by eGrove. It has been accepted for inclusion in Management Services: A Magazine of Planning, Systems, and Controls by an authorized editor of eGrove. For more information, please contact egrove@olemiss.edu. A NEW APPROACHTO THEBREAKEVEN CHARTThe conventional breakeven chart, because it must  assume a fixed set of conditions, can be a very unreliable tool for prediction, A dynamic breakeven chart, based on markup on variable costs, is safer and far more valuable as a working management tool.by William E. Arnstein and Edgar A. MackS. D. Leidesdorf and Co.This article introduces a flex­ible breakeven chart, one use­ful in profit planning and control.  Breakeven analysis is not new. Its goal is to focus attention on the re­lationship among volume, price, and profit. Experience shows, however, that the classic breakeven chart  often fails as a working tool for ex­ecutives. A more helpful technique is therefore needed. But first let us take a close and critical look at the classic chart.We are all familiar with the  straight-line breakeven graph. Peri­od costs, variable costs, and sales revenue are charted in relation to volume expressed in units, per cent of plant capacity, or sales dollars. Exhibit I (left) is an example of the straight-line breakeven chart.601Arnstein and Mack: New Approach to the Breakeven ChartPublished by eGrove, 1964A chart of this type necessarily as­sumes a fixed set of conditions: a given product mix, unit selling prices, and a rate (or level) of mar­keting expenses. Unfortunately, the classic breakeven chart lends itself to misuse, particularly when man­agement fails to clearly understand the underlying assumptions, or fails to remember them.Dangers of chartHere is how this chart might be misused—unintentionally—in deci­sion making. A greater and seem­ingly profitable volume is planned, but by means differing from the fixed conditions of the chart—by changing the product mix and em­phasizing lines with low profit mar ­gins; or by shaving sales prices; or by increasing promotion and adver­tising expenses. The volume goal is reached, but profits fall far short of the expectations appearing on the chart. The writers are familiar with instances in which the increased volume actually showed lower profits than the original volume.What should have been done, of course, was to prepare a new break­even chart reflecting the new as­sumptions. This only points up an­other disadvantage of the classic chart—inflexibility.A novel but useful approach to breakeven analysis considers the breakeven point as the percentage markup on variable costs required to recover all costs. Note the mark­up percentage refers to the markup on variable costs, not that related to selling price.To construct a breakeven chart based on this concept entails four  relatively easy steps. The analyst determines period costs, selects several likely levels of variable costs, and computes the relation­ship of period costs to each variable cost selected. These percentages are the breakeven points, that is,they show the markup on variable  costs required to break even. The last step is plotting the percentages  on a chart.Exhibit II illustrates a break­even chart of this type. In Exhibit II, period costs are $100,000,  and the variable costs range from $100,000 to $500,000, in steps of $20,000. As was to be expected, the breakeven points line up as a curve.The chart in Exhibit II attains flexibility without danger of unin­tentional misuse, because it does not assume a fixed set of conditions.Suppose a company contemplates a different product mix, or buying rather than manufacturing finished products—the breakeven point,and  the profitability of a particular level of volume, fluctuates with each contemplated change in conditions. To denote the new breakeven point,  etc., a new chart is normally needed.If more than one change in con­dition is being considered, several charts are needed. By using the markup on variable costs approach, each new breakeven point can be quickly calculated once the new total of variable costs is known.The breakeven calculation in Ex­hibit II has the advantage of not being coupled to sales. It is not necessary to project unit selling price, product mix, and total sales to compute breakeven points. Under the markup approach the total sales required to break even is found afterwards—by applying the mark­up percentage to forecasted vari­able costs.Other capabilitiesExhibit III (page 62) illustrates a chart showing the markup on vari­able costs required to earn a spe-612Management Services: A Magazine of Planning, Systems, and Controls, Vol. 1 [1964], No. 1, Art. 12https://egrove.olemiss.edu/mgmtservices/vol1/iss1/12The typical breakeven chart is seldom used by executives . . .cific profit. In this example, the planned profit is $10,000 and the  period costs are $100,000 (as in Ex­hibit II). The desired profit is built into the required markup by add­ing profit to period costs before  computing percentages.A chart of this type is not limited to a single profit plan. By simply  having several curves on a chart, one chart can show the required markup for several profit plans— $10,000, $20,000, $30,000, etc. Simi­larly, one chart can indicate the re­quired markup for breaking even at several levels of fixed costs. This is especially useful if a rise in fixed costs is anticipated. It is evident then that a single chart can display  the required markup for several combinations of profit plans and  period costs—and all in relation to  any level of variable costs.A desirable feature of a multi­curve chart is its ability to give in­formation not specifically plotted in it. For example, a chart which shows several profit plans can be used to quickly approximate, by interpolation, the required markup for a profit plan not drawn on the chart. Another example is seen in Exhibit III. If fixed costs were to unexpectedly rise 10 per cent (the exact relation of projected profit, $10,000, to fixed costs, $100,000), then the profit plan curve can be  used to determine the markup to break even. If fixed costs were to rise 5 per cent, the markup to break­even can be estimated by inter­polation.The typical breakeven chart is seldom used by executives, either because they don’t fully understand  it or because they recognize its in­herent limitations. With meager control tools for guidance, especi ­ally in smaller companies, managers make decisions on experience, on an  indefinable “feel” of the business. Sometimes this is enough. More often, however, it is not, and a breakeven chart would help, pro­viding it is easy to use, but not to misuse.In contrast to the classic break­even chart—which summarizes a fixed set of assumptions or reports past results—the chart recom­mended here is a working tool. It is a reliable device designed for continual use.623Arnstein and Mack: New Approach to the Breakeven ChartPublished by eGrove, 1964

New Approach to the Breakeven Chart

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New Approach to the Breakeven Chart

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