Marginal Costing

The cost of producing one extra unit of output (the variable costs) Selling price MC = Contribution Contribution is the amount which can contribute to the overheads (fixed costs)

Break Even

Break Even Analysis

Costs/Revenue TR TR TC VC
The Total Initially break revenue even a firm is The lower the determined point will occurs incur by where fixed As output is price, the less The total costs the total costs, price revenue charged these generated, the steep the total therefore and equals do the not total quantity depend costs firm willcurve. incur revenue (assuming sold the on firm, output again in this this or variable costs accurate will example, sales. be vary would these forecasts!) is the determined have to sell by Q1 to directly with sum of FC+VC the expected generate amount sufficient forecast revenue sales to cover its produced. initially. costs.

FC

Q1

Output/Sales

Costs/Revenue

Break Even Analysis

TR (p = 3) TR (p = 2)

TC

VC

If the firm chose to set price higher than 2 (say 3) the TR curve would be steeper they would not have to sell as many units to break even

FC

Q2

Q1

Output/Sales

Break Even Analysis

Costs/Revenue
TR (p = 1) TR (p = 2)

TC

VC

If the firm chose to set prices lower (say 1) it would need to sell more units before covering its costs.

FC

Q1

Q3

Output/Sales