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Costs/Revenue

Break-Even Analysis
TR TR TC

As revenue is Totallowercosts The total The output isthe generated, the Initially a firm determined by price,will incurthe the Thetherefore less Break-even firm charged point will VC occurs where total price incur fixed (assuming and variable total steep thecosts costs, these do the quantity sold revenue equals total accurate on thesethiscurve. not vary revenuefirm, in again depend be will costs the

forecasts!) is the directly or bythe output with determined sales. this sum of produced example would The Break-even point amount forecast expected FC+VC have to value ofto key is the sell Q1 a sales initially. generateat which we factor sufficient revenue to cover its are indifferent costs. between two alternatives

FC

Q1

Output/Sales

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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

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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

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Break-Even Analysis
Costs/Revenue
TR (p = 2)

TC VC

Profit

Loss FC

Q1

Output/Sales

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Break-Even Analysis
Costs/Revenue
TR (p = 3)
TR (p = 2)

TC VC

Margin of A higher price safety shows how far lower would sales can break the fall before Assume losses made. If even1000sales point current and Q1 = andQ2 sales Q2 =the at 1800, could fall by margin of 800 units before a safety would loss would be widen made

Margin of Safety FC

Q3

Q1

Q2

Output/Sales

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Costs/Revenue

High initial FC. Eurotunnels FC 1 Interest on debt problem year FC rises each rise therefore

FC Losses get bigger!

TR VC

Output/Sales

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Break-Even Analysis
Remember: A higher price or lower price does not mean that break even will never be reached! The BE point depends on the number of sales needed to generate revenue to cover costs the BE chart is NOT time related!

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Break-Even Analysis
Importance of Price Elasticity of Demand: Higher prices might mean fewer sales to break-even but those sales may take a longer time to achieve. Lower prices might encourage more customers but higher volume needed before sufficient revenue generated to break-even

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Break-Even Analysis
Links of BE to pricing strategies and elasticity Penetration pricing high volume, low price more sales to break even Market Skimming high price low volumes fewer sales to break even Elasticity what is likely to happen to sales when prices are increased or decreased?

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Formula
Break Even Point (of Output)
Fixed cost / contribution per unit Where, Contribution = selling price average variable cost Fixed cost = Contribution - profit

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Formula
Break Even point of sales Fixed price * SP Per unit
Contribution per unit

Fixed cost * total sales


Total Contribution

Calculation of break even point

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