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Costs/Revenue

Break-Even Analysis
TR TR TC VC

TheAs output is point Break-even Totallowercosts The total the The revenue is occurs where total generated, firm Initially a determined the therefore less revenue equalsby the price,will incur the total firm charged and will incur fixed pricethe firm, in (assuming costs thecosts variable total steep these do costs, the quantity sold this accurate would example thesethis will not vary revenue curve. again depend on have to sell Q1 tobe forecasts!) is the directly or bythe output with determined sales. generate sufficient amount FC+VC sum of forecast expected produced revenue to cover its sales costs. initially.

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
Copyright 2004 Biz/ed

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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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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!
Copyright 2004 Biz/ed

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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?
Copyright 2004 Biz/ed