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Assignment of Break Even Point
Assignment of Break Even Point
Assignment of Break Even Point
Costs/Revenue TR TR TC VC
FC
Q1
Output/Sales
1 Initially a firm will incur fixed costs, these do not depend on output or sales.
2 As output is generated, the firm will incur variable costs these vary directly with the amount produced.
3 The total costs therefore (assuming accurate forecasts!) is the sum of FC+VC
4 Total revenue is determined by the price charged and the quantity sold again this will be determined by expected forecast sales initially.
5 The lower the price, the less steep the total revenue curve.
6 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.
7 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
8 If the firm chose to set prices lower (say 1) it would need to sell more units before covering its costs.
10 Margin of safety shows how far sales can fall before losses made. If Q1 = 1000 and Q2 = 1800, sales could fall by 800 units before a loss would be made.
11 A higher price would lower the break even point and the margin of safety would widen.
13 High initial FC. Interest on debt rises each year FC rise therefore.
15 If the firm chose to set prices lower (say 1) it would need to sell more units before covering its costs.
16 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
Break Even
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
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
TC VC
Profit
Loss FC
Q1
Output/Sales
TC VC
Margin of safety shows A higher sales how far price Assume would lower the can fall before current sales break even losses made. If at = 1000 and point and the Q1 Q2. margin1800, Q2 = of safety would could fall sales widen. by 800 units before a loss would be made.
Margin of Safety FC
Q3
Q1
Q2
Output/Sales