MODIFIED BREAKEVEN ANALYSIS

1. MODIFIED BREAKEVEN ANALYSIS TOTAL COST CURVES: COSTS AVERAGE COST CURVES: COSTS TOTAL COSTS VARIABLE COSTS FIXED COSTS QUANTITY QUANTITY AVERAGE TOTAL COSTS AVERAGE VARIABLE COSTS AVERAGE FIXED COSTS

2. MODIFIED BREAKEVEN ANALYSIS PROFIT = TOTAL REVENUE - TOTAL COST TOTAL REVENUE = UNIT PRICE X QUANTITY SOLD TOTAL COST = FIXED COST + VARIABLE COST BREAKEVEN POINT: TR = TC TR = VC + FC (UNITS)($/UNIT) = (UNITS)($/UNIT) + FC PRICE COST SALES REVENUE AND COSTS TOTAL REVENUE TOTAL COST VARIABLE COST FIXED COST BREAKEVEN PRICE BREAKEVEN QUANTITY QUANTITY

3. MODIFIED BREAKEVEN ANALYSIS • GIVEN: • FIRM DETERMINES (INTERNAL): • VARIABLE COSTS • FIXED COSTS • FIRMS DETERMINES (EXTERNAL): • DEMAND FUNCTION (MARKET RESEARCH) • BREAKEVEN UNITS: TOTAL FIXED COSTS PRICE - VARIABLE COST PER UNIT BREAKEVEN UNITS = PRICE - VARIABLE COST PER UNIT = CONTRIBUTION TO FIXED COST

4. 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

5. MODIFIED BREAKEVEN ANALYSIS EXAMPLE DEMAND CURVE: 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 15 10 5 0 PRICE 0 5 10 15 QUANTITY (K)

6. 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???

7. 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

8. MODIFIED BREAKEVEN ANALYSIS EXAMPLE TR @ $12 TR @ $10 $144K COST • TOTAL COST • VARIABLE COST • TOTAL REVENUE • AT DEMANDED • QUANTITIES- • FIXED COST $144K REVENUE 150 100 50 0 COST AND REVENUE (K DOLLARS) $150K (BE) $120K (BE) $140K REVENUE $132K COST BREAKEVEN QUANTITIES DEMANDED QUANTITIES 0 5 10 15 20 QUANTITY (K UNITS) 12 14

9. MODIFIED BREAKEVEN ANALYSIS EXAMPLE • SENSITIVITY ANALYSIS • DEMAND (REVENUE): SUPPLY (COST): • UNITSPRICETOTAL REVENUEC.T.F.C.TOTAL COSTPROFIT • 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