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BREAKEVEN ANALYSIS

VARIABLE COSTS (VC)

  • Costs that are directly related to production or sales volume.
    • As volume increases, TVC increases.
      As volume decreases, TVC decreases.
    • We usually assume that per-unit VCs are constant over a given range.
    • e.g.:
      • raw materials
      • commissions
      • commissions
      • shipping
      • etc.

FIXED COSTS (FC)

  • Ongoing costs that are unrelated to production or sales volume.
    • Generally constant over a fixed range.
    • In the short run, they usually cannot be changed.
    • e.g.:
      • rent
      • salaries of full time employees
      • property taxes
      • equipment payments
      • etc.

TOTAL COST (TC)

  • fixed costs + variable costs

PRICE (P)

  • price/unit after discounts, etc.
  • revenue per unit

TOTAL REVENUE (TR)

  • P*Q = price x quantity sold

UNIT CONTRIBUTION (MR)

  • margin/unit
  • MR = (P - VC)

PROFIT (¶)

  • aka Net Contribution
  • profit:
    • = TR - TC
    • = TR - FC - TVC
    • = P*Q - FC - Q(VC)
    • = Q(P - VC) - VC
    • = Q(MR) - FC

  • when TR > TC, then profit
  • when TR < TC, then loss

When does breakeven occur?

  • when ¶ = zero = (TR - TC)
  • when TR = TC

  • recall
    • ¶ = Q(MR) - FC
    • 0 = Q(MR) - FC
    • FC = Q(MR)
    • FC/MR = Qbe