Lecture3 - Lecture Development of the Break-Even Model Validating the Break-Even Model Enhancing the Break-Even Model 1 Production above capacity a

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Unformatted text preview: Lecture 1/18/08 Development of the Break-Even Model Validating the Break-Even Model Enhancing the Break-Even Model 1. Production above capacity a. Additional Production Cost Linear Break-Even Models Break-even point = the production quantity that yields a zero profit (total costs=total revenues) Assumptions in break-even analysis 1. Variable cost is proportional to the level of production 2. Total revenue (PxQ) is proportional to the level of production. Linear Break-Even Models Definition of Variables Q = number of units produced per period P = selling price per unit R(Q) = revenue from selling Q units of product F = fixed cost per period V = variable cost per unit TC(Q) = Total cost of producing and selling Q units TP(Q) = Total profit per period of selling Q units N = Normal production capacity (most we can produce under normal conditions, limited by equipment, budget) Linear Break-Even Models Submodels V Q F Q T C P Q Q R + = = ) ( ) ( Linear Break-Even Models Submodels VQ F PQ Q TC Q R Q TP VQ F Q TC PQ Q R-- =- = + = = ) ( ) ( ) ( ) ( ) ( Linear Break-Even Models Submodels F- V)Q- (P ) ( ) ( ) ( ) ( ) ( =-- =- = + = = VQ F PQ Q TC Q R Q TP VQ F Q TC PQ Q R Linear Break-Even Models Submodels or TP(Q) Point Breakeven F- V)Q- (P ) ( ) ( ) ( ) ( ) ( = ⇒ =-- =- = + = = VQ F PQ Q TC Q R Q TP VQ F Q TC PQ Q R Linear Break-Even Models Submodels V- P F Q F- V)Q- (P or TP(Q) Point Breakeven F- V)Q- (P ) ( ) ( ) ( ) ( ) ( = ⇒ = = ⇒ =-- =- = + = = VQ F PQ Q TC Q R Q TP VQ F Q TC PQ Q R Break- Even Point Q (production qty) Break-Even Point = F/(P-V) R(Q)=P*Q F TC(Q)=F+VQ Cost ($) Validity Check = = V- P F P PQ ) R(Q Q point even - break At * * * Validity Check = = = V- P P F V- P F P PQ ) R(Q Q point even - break At * * * Validity Check...
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This note was uploaded on 04/17/2008 for the course CSA 273 taught by Professor Patton during the Spring '08 term at Miami University.

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Lecture3 - Lecture Development of the Break-Even Model Validating the Break-Even Model Enhancing the Break-Even Model 1 Production above capacity a

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