Business Economics 08 Breakeven Analysis

Breakeven Analysis or Profit Contribution Analysis or Cost-volume-profit (CVP) Analysis

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Non linear costs and revenue functions TFC TVC TR TC  Q1 Q2 Q3 TC TR,TC,  A B a b C D losses profits

Managerial uses of breakeven analysis ,[object Object],[object Object],[object Object],[object Object],[object Object]

Margin of safety ,[object Object],[object Object],[object Object],[object Object],[object Object]

Required rate of profit (  R ) Q ,[object Object],[object Object]

Change in price ,[object Object],[object Object],[object Object],[object Object],[object Object]

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Change in cost ,[object Object],[object Object]

Change in fixed cost ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Change in variable costs ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Operating leverages ,[object Object]

Leverage is analyzed using profit elasticity an indicator of risk

Operating leverages ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

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Example Operating profit elasticity for two firms VG/lv/P-II-6 firm a firm b price = 10 price = 10 AVC = 5 AVC = 2 AFC = 1000 TFC = 4000 Output sale profit E  firm A firm B firm A firm B 1000 4000 4000 1.25 2.00 1500 6500 8000 1.15 1.50 2000 9000 12000 1.11 1.33 2500 11500 16000 1.09 1.25 3000 14000 20000 1.07 1.20

Policy guidelines emanating from break even analysis ,[object Object],[object Object],[object Object],VG/lv/P-II-6

Business Economics 08 Breakeven Analysis

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Business Economics 08 Breakeven Analysis