Break-even analysis determines the level of sales or production needed for a business to neither profit nor lose money. It categorizes costs as either fixed costs that do not change with production or variable costs that change with production levels. The break-even point is where total revenue from sales equals total costs. The price charged affects total revenue and the sales volume needed to break even. Higher prices may decrease sales volume required but take longer to reach, while lower prices may increase sales but require a higher volume.
A breakeven analysis is used to determine how much sales volume your business needs to start making a profit.
The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.
A breakeven analysis is used to determine how much sales volume your business needs to start making a profit.
The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.
1. to understand the basic principles of Material Control
2. to study the procedures of Purchase, Storing and Issues
3. to acquaint with the latest techniques in inventory control
4. to understand the pricing of issues
To understand the basic concepts of marginal cost and marginal costing.
To understand the difference between the Absorption costing and Marginal Costing.
To learn the practical applications of Marginal costing.
To understand Breakeven charts & Limitation
INTRODUCTION
A breakeven analysis is used to determine how much sales volume your business needs to start making a profit.
The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.
In economics & business, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even".
Total cost = Total revenue = B.E.P.
1. to understand the basic principles of Material Control
2. to study the procedures of Purchase, Storing and Issues
3. to acquaint with the latest techniques in inventory control
4. to understand the pricing of issues
To understand the basic concepts of marginal cost and marginal costing.
To understand the difference between the Absorption costing and Marginal Costing.
To learn the practical applications of Marginal costing.
To understand Breakeven charts & Limitation
INTRODUCTION
A breakeven analysis is used to determine how much sales volume your business needs to start making a profit.
The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.
In economics & business, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even".
Total cost = Total revenue = B.E.P.
Cost and production analysis - Cost concepts – Cost and output relationship - cost control – Short run and Long run - cost functions - production functions – Break-even analysis - Economies scale of production.
Fundamentals of EconomicsA. Profit MaximizationProfit Maximi.docxbudbarber38650
Fundamentals of Economics
A. Profit Maximization
Profit Maximization is the determination of the best output in relation to price levels so that returns for the firm are maximized. A company usually has profit goals that must be reach, so various strategies such as reducing production costs, adjusting sale prices, and maximizing output levels are used.
A company should always use profit maximization methods, but these methods may negatively affect consumers if the method results in poor-quality product or higher prices.
Two main methods are use in profit maximization: a) Total Cost-Total Revenue Method and b) Marginal Cost-Marginal Revenue Method.
a) Total revenue to total cost
Total revenue less total cost is the profit, expressed as Π = TR – TC. Total revenue is the total amount of money the company receives from selling its products, or from other aspects of its business operations. Total cost is the sum of all aspects of the company’s production and operations, including non-monetary costs. Non-monetary costs include items that were not paid in cash but were incurred, like the time spent by the owner managing the business, or the equivalent cost of using the land or machineries of the owners, as if they are being rented.
If non-monetary costs will not be included in the computation of revenue, an accounting profit will result, but it will not be the actual economic profit. To obtain the economic profit, all explicit and implicit costs should be accounted for, including opportunity costs.
To find out how much profit the firm actually make, costs have to be determined. All the information can be derived from ATC. As ATC = TC/Q, so TC = ATC x Q. Profit maximization levels can be found by the simple multiplication and subtraction approach. Profit maximization = Total Revenue (TR) – Costs (C). (NEWLY ADDED)
Criterion Score:2.00
Comments on this criterion (optional): The submission explains Total Revenue and Total Cost.
However, the point at which profit maximization is reached and how it is recognized using total
revenue and total cost as criteria could not be located in the submission. Please revise and
resubmit.
b) Marginal revenue to marginal cost
Marginal revenue is the added revenue when one more unit of output is sold. The profit maximizing level of output for monopolists is arrived at after equating its marginal revenue and its marginal cost. This is also the same condition for profit maximization that a perfectly competitive firm uses in determining its output equilibrium level. Marginal revenue equals marginal cost is the condition firms in different market structures use in determining their profit maximizing level of output.
Marginal cost is the cost of the additional unit, or the cost of produce one more unit. It is hard to determine the exact cost of the last unit, but the average cost of a group of units can easily be calculated. The change in costs from a previous level is divided by the change in quantity fr.
5. Break-Even Analysis Costs/Revenue Output/Sales Initially a firm will incur fixed costs, these do not depend on output or sales. FC As output is generated, the firm will incur variable costs – these vary directly with the amount produced VC The total costs therefore (assuming accurate forecasts!) is the sum of FC+VC TC Total revenue is determined by the price charged and the quantity sold – again this will be determined by expected forecast sales initially. TR The lower the price, the less steep the total revenue curve. TR Q1 The Break-even point occurs where total revenue equals total costs – the firm, in this example would have to sell Q1 to generate sufficient revenue to cover its costs.
6. Break-Even Analysis Costs/Revenue Output/Sales FC VC TC TR (p = 2) Q1 If the firm chose to set price higher than 2 (say 3) the TR curve would be steeper – they would now have to sell Q2 units to break even TR (p = 3) Q2
7. Break-Even Analysis Costs/Revenue Output/Sales FC VC TC TR (p = 2) Q1 If the firm chose to set prices lower (say 1) it would need to sell more units before covering its costs TR (p = 1) Q3
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