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Lecture5

# Lecture5 - Lecture Breakeven Analysis Review Non-linear...

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Lecture 1/25/08 Breakeven Analysis Review Non-linear Breakeven Models 1. Relationship Between Marginal and Average Cost 2. Example

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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
Development of Break-Even Model Total Profit = Total Revenue-Total Cost TP(Q) = R(Q)-TC(Q) R(Q)= P*Q TC(Q)=F+v*Q TP(Q)=P*Q-F-v*Q=(P-v)Q - F Breakeven Point is production (or order) quantity Q* such that TP(Q)=0 TP(Q)=0 => Q*=F/(P-v)

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Linear Break-Even Models Marginal Cost and Revenue Marginal Cost=Average change in cost per unit increase in output. Marginal cost at any point q = slope of tangent line to the cost curve at that point. Marginal Revenue=Average change in revenue per unit increase in output.
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