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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