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Modified Break Even Analysis

The document discusses modified breakeven analysis for determining the optimal price for a product. It explains the concepts of fixed costs, variable costs, total costs, contribution margin, breakeven point, and profit/loss. An example is provided comparing selling a product at $10 versus $12. At $10 the firm would sell 14,000 units but lose $4,000, while at $12 it would sell 12,000 units but make a $12,000 profit. The document concludes by discussing how demand and costs can be varied in a sensitivity analysis.

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492 views

Modified Break Even Analysis

The document discusses modified breakeven analysis for determining the optimal price for a product. It explains the concepts of fixed costs, variable costs, total costs, contribution margin, breakeven point, and profit/loss. An example is provided comparing selling a product at $10 versus $12. At $10 the firm would sell 14,000 units but lose $4,000, while at $12 it would sell 12,000 units but make a $12,000 profit. The document concludes by discussing how demand and costs can be varied in a sensitivity analysis.

Uploaded by

erdeeparathi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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2003 Dr. Murray R.

Millson
MODIFIED BREAKEVEN
ANALYSIS
TOTAL COST CURVES:

COSTS





AVERAGE COST CURVES:

COSTS
FIXED COSTS
VARIABLE COSTS
TOTAL COSTS
QUANTITY








QUANTITY
AVERAGE TOTAL COSTS


AVERAGE VARIABLE COSTS

AVERAGE FIXED COSTS
2003 Dr. Murray R. Millson
MODIFIED BREAKEVEN ANALYSIS
PROFIT = TOTAL REVENUE - TOTAL COST
TOTAL REVENUE = UNIT PRICE X QUANTITY SOLD
TOTAL COST = FIXED COST + VARIABLE COST
TOTAL REVENUE


TOTAL COST


VARIABLE COST






FIXED COST
QUANTITY
SALES
REVENUE
AND
COSTS
BREAKEVEN
PRICE
BREAKEVEN
QUANTITY
BREAKEVEN POINT:
TR = TC
TR = VC + FC
(UNITS)($/UNIT) = (UNITS)($/UNIT) + FC
PRICE COST
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
2003 Dr. Murray R. Millson
MODIFIED BREAKEVEN
ANALYSIS 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
2003 Dr. Murray R. Millson
MODIFIED BREAKEVEN
ANALYSIS EXAMPLE
DEMAND CURVE:
15



10



5



0
0 5 10 15 QUANTITY (K)
PRICE
DEMAND:
14,000 UNITS @ $10
12,000 UNITS @ $12

TR (@ $10) = 10 X 14,000 = $140,000
TR (@ $12) = 12 X 12,000 = $144,000
2003 Dr. Murray R. Millson
MODIFIED BREAKEVEN
ANALYSIS 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???
2003 Dr. Murray R. Millson
MODIFIED BREAKEVEN
ANALYSIS EXAMPLE
VARIABLE AND TOTAL COST AT BREAKEVEN (@ PRICE = $10.00)
VC = 6(15,000) = $90,000
TC = 60,000 + 90,000 = $150,000
VARIABLE AND TOTAL COST OF DEMANDED UNITS:
VC = 6(14,000) = $84,000
TC = 60,000 + 84,000 = $144,000
TOTAL REVENUE OF THOSE DEMANDED:
TR = 10(14,000) = $140,000
PROFIT OR LOSS:
LOSS = $140,000 - $144,000 = -$4,000

VARIABLE AND TOTAL COST AT BREAKEVEN (@ PRICE = $ 12.00)
VC = 6(10,000) = $60,000
TC = 60,000 + 60,000 = $120,000
VARIABLE AND TOTAL COST OF DEMANDED UNITS:
VC = 6(12,000) = $72,000
TC = 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
2003 Dr. Murray R. Millson
TOTAL COST




VARIABLE COST

TOTAL REVENUE
AT DEMANDED
QUANTITIES-




FIXED COST
MODIFIED BREAKEVEN ANALYSIS
EXAMPLE
150





100





50





0
0 5 10 15 20 QUANTITY (K UNITS)
COST
AND
REVENUE
(K DOLLARS)
12 14
TR @ $12 TR @ $10
$120K
(BE)
$150K
(BE)
BREAKEVEN QUANTITIES

DEMANDED QUANTITIES
$144K
REVENUE
$140K
REVENUE
$132K
COST
$144K
COST
2003 Dr. Murray R. Millson
MODIFIED BREAKEVEN
ANALYSIS 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

(Y
1
- Y
2
) = S (X
1
- X
2
)
(10 - 18) = S (14,000 - 6,000)
S = -0.001

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