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