Chapter 12 - Spring 2010

Chapter 12 - Spring 2010 - CHAPTER 12 Break-Even...

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Unformatted text preview: CHAPTER 12 Break-Even Comparisons HW due:3/30/10 Chapter 12 • A2 • A.4 • A8 • A9 • C.1 DEFINITION The Break-Even Point (BEP) is the point where business neither makes a profit nor sustains a loss RELATIONSHIPS • TOTAL REVENUE = (# Of Units) x (Revenue Per Unit) • TOTAL VARIABLE COST = (# Of Units) x (Variable Cost Per Unit) • TOTAL COST = Fixed Cost + Total Variable Cost • TOTAL REVENUE = Fixed Cost + Total Variable Cost + Net Income QUICK FACTS • A break - even point defines when an investment will generate positive return • Fixed costs are not directly related to the level of production • Variable costs change in direct relation to volume of output • Total fixed costs do not change as the level of production increases BREAK- EVEN ANALYSIS • BE analysis is a useful tool to study the relationship between fixed costs, variable costs and returns • BEP defines when an investment will generate positive return • BE price analysis computes the price necessary at a given level of production to cover ALL costs **Cost items** VARIABLE COSTS - Change in direct relation to volume of output (O&M, cost of materials, labor, equipment,etc). FIXED COSTS - Are not directly related to the level of production (depreciation, interest costs, taxes, general overhead expenses) Profit range above the BEP depends on the nature of the business LOW Fixed Costs and HIGH Variable Costs restrict PROFIT more than HIGH Fixed Costs and LOW Variable Costs Ideal situation: • LOW FIXED COSTS • LOW VARIABLE COSTS •...
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Chapter 12 - Spring 2010 - CHAPTER 12 Break-Even...

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