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11 Break-Even Analysis Common tool for analyzing the relationship between
sales volume and profitability
There are three common break-even measures Accounting break-even – sales volume at which net income =
Cash break-even – sales volume at which operating cash flow
Financial break-even – sales volume at which net present
value = 0
12 Example: Costs There are two types of costs that are important in
breakeven analysis: variable and fixed
breakeven Total variable costs = quantity * cost per unit
Fixed costs are constant, regardless of output, over some time
Total costs = fixed + variable = FC + vQ Example: Your firm pays $3000 per month in fixed costs. You also pay
$15 per unit to produce your product.
• What is your total cost if you produce 1000 units?
• What if you produce 5000 units? 13
13 Average vs. Marginal Cost Average Cost Marginal Cost TC / # of units
Will decrease as # of units increases
The cost to produce one more unit
Same as variable cost per unit Example: What is the average cost and marginal cost under
each situation in the previous example
each Produce 1000 units: Average = 18,000 / 1000 = $18
Produce 5000 units: Average = 78,000 / 5000 = $15.60 14
14 Accounting Break-Even The quantity that leads to a zero net
income NI = (Sales – VC – F...
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This document was uploaded on 03/01/2014 for the course FINANCE 250 at Indiana.
- Spring '14