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That leads to a if negative npv with a small change

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Unformatted text preview: want to forego the project project 11 11 Break-Even Analysis Common tool for analyzing the relationship between Common sales volume and profitability sales There are three common break-even measures Accounting break-even – sales volume at which net income = Accounting 0 Cash break-even – sales volume at which operating cash flow Cash =0 Financial break-even – sales volume at which net present Financial value = 0 value 12 12 Example: Costs There are two types of costs that are important in There breakeven analysis: variable and fixed breakeven Total variable costs = quantity * cost per unit Fixed costs are constant, regardless of output, over some time Fixed period period Total costs = fixed + variable = FC + vQ Example: Your firm pays $3000 per month in fixed costs. You also pay Your $15 per unit to produce your product. $15 • 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 Example: 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 The income income NI = (Sales – VC – F...
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