5/21/2018 Modified Break Even Analysis

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2003 Dr. Murray R. Millson

MODIFIED BREAKEVEN

ANALYSISTOTAL COST CURVES:

COSTS

AVERAGE COST CURVES:

COSTS

FIXED COSTS

VARIABLE COSTS

TOTAL COSTS

QUANTITY

QUANTITY

AVERAGE TOTAL COSTS

AVERAGE VARIABLE COSTS

AVERAGE FIXED COSTS

5/21/2018 Modified Break Even Analysis

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2003 Dr. Murray R. Millson

MODIFIED BREAKEVEN ANALYSIS

PROFIT = TOTAL REVENUE - TOTAL COSTTOTAL REVENUE = UNIT PRICE X QUANTITY SOLDTOTAL COST = FIXED COST + VARIABLE COST

TOTAL REVENUE

TOTAL COST

VARIABLE COST

FIXED COST

QUANTITY

SALES

REVENUEANDCOSTS

BREAKEVEN

PRICE

BREAKEVEN

QUANTITY

BREAKEVEN POINT:TR = TCTR = VC + FC(UNITS)($/UNIT) = (UNITS)($/UNIT) + FC

PRICE COST

5/21/2018 Modified Break Even Analysis

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2003 Dr. Murray R. Millson

MODIFIED BREAKEVEN

ANALYSIS GIVEN:

FIRM DETERMINES (INTERNAL):

VARIABLE COSTS

FIXED COSTS FIRMS DETERMINES (EXTERNAL):

DEMAND FUNCTION (MARKET RESEARCH)

BREAKEVEN UNITS:

BREAKEVEN UNITS =

PRICE - VARIABLE COST PER UNIT = CONTRIBUTION TO FIXED COST

TOTAL FIXED COSTS

PRICE - VARIABLE COST PER UNIT

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2003 Dr. Murray R. Millson

MODIFIED BREAKEVENANALYSIS EXAMPLE

PROBLEM: SELECT A PRICE OF $10 OR $12 FOR PRODUCT X

FACTS: FIXED COST = $60,000

VARIABLE COST PER UNIT = $6.00

DEMAND IS LIKELY TO BE:

Q = 14,000 UNITS SOLD @ $10.00

Q = 12,000 UNITS SOLD @ $12.00

5/21/2018 Modified Break Even Analysis

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2003 Dr. Murray R. Millson

MODIFIED BREAKEVENANALYSIS EXAMPLE

DEMAND CURVE:

15

10

5

0

0 5 10 15 QUANTITY (K)

PRICE

DEMAND:14,000 UNITS @ $1012,000 UNITS @ $12

TR (@ $10) = 10 X 14,000 = $140,000

TR (@ $12) = 12 X 12,000 = $144,000

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MODIFIED BREAKEVENANALYSIS EXAMPLE

CONTRIBUTION TO FIXED COST PROCESS:

@ $10.00 @ $12.00

$60,000 /$4.00 = 15,000 UNITS $60,000 / $6.00 = 10,000 UNITS

DEMANDED UNITS:

14,000 UNITS 12,000 UNITS

BREAKEVEN GREATER THAN BREAKEVEN LESS THAN

DEMAND - LOSE MONEY DEMAND - MAKE PROFIT

BUT, HOW MUCH???

5/21/2018 Modified Break Even Analysis

7/92003 Dr. Murray R. Millson

MODIFIED BREAKEVENANALYSIS EXAMPLE

VARIABLE AND TOTAL COST AT BREAKEVEN (@ PRICE = $10.00)VC = 6(15,000) = $90,000TC = 60,000 + 90,000 = $150,000

VARIABLE AND TOTAL COST OF DEMANDED UNITS:VC = 6(14,000) = $84,000TC = 60,000 + 84,000 = $144,000

TOTAL REVENUE OF THOSE DEMANDED:TR = 10(14,000) = $140,000PROFIT OR LOSS:

LOSS = $140,000 - $144,000 = -$4,000

VARIABLE AND TOTAL COST AT BREAKEVEN (@ PRICE = $ 12.00)VC = 6(10,000) = $60,000TC = 60,000 + 60,000 = $120,000

VARIABLE AND TOTAL COST OF DEMANDED UNITS:VC = 6(12,000) = $72,000TC = 60,000 + 72,000 = $132,000

TOTAL REVENUE OF THOSE DEMANDED:TR = 12(12,000) = $144,000

PROFIT OR LOSS:

PROFIT = $144,000 - $132,000 = +$12,000

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TOTAL COST

VARIABLE COST

TOTAL REVENUEAT DEMANDEDQUANTITIES-

FIXED COST

MODIFIED BREAKEVEN ANALYSISEXAMPLE

150

100

50

0

0 5 10 15 20 QUANTITY (K UNITS)

COSTAND

REVENUE(K DOLLARS)

12 14

TR @ $12 TR @ $10

$120K(BE)

$150K(BE)

BREAKEVEN QUANTITIES

DEMANDED QUANTITIES

$144KREVENUE

$140KREVENUE

$132KCOST

$144KCOST

5/21/2018 Modified Break Even Analysis

9/92003 Dr. Murray R. Millson

MODIFIED BREAKEVENANALYSIS EXAMPLE

SENSITIVITY ANALYSIS

DEMAND (REVENUE): SUPPLY (COST):

UNITS PRICE TOTAL REVENUE C.T.F.C. TOTAL COST PROFIT

18,000 $6 $108,000 $0 $168,000 ($60,000)

14,000 $10 $140,000 $4 $144,000 ($4,000)

13,000 $11 $143,000 $5 $138,000 $5,000

12,000 $12 $144,000 $6 $132,000 $12,000

11,000 $13 $143,000 $7 $126,000 $17,000

6,000 $18 $108,000 $12 $ 96,000 $12,000

POINT SLOPE FORMULA

(Y1- Y2) = S (X1- X2)(10 - 18) = S (14,000 - 6,000)

S = -0.001