3.3 Break Even Analysis

Question 1

Revenue (r) (TR)

Answer 1

Income from sale of goods and Services

P x Q

Question 2

Fixed Costs (FC) (TFC)

Answer 2

Costs that do not change without output

Question 3

Variable costs (VC) (TVC)

Answer 3

Costs that change with output (increase as quantity increases)

Question 4

Total Costs (TC)

Answer 4

= TFC + TVC

Question 5

Profit (P)

Answer 5

Profit = TR - TC

Question 6

Break Even Analysis Formula
(Quantity)

Answer 6

Question 7

Break Even / Break even Quantity (BEQ)

Answer 7

• Where profit = 0
• Total costs = total revenue

Question 8

Break even chart creation steps

Answer 8

1. Calc BEQ
2. Draw Axis w correct max capacity and revenue (quantity at bottom)
3. Fixed Costs line (horizontal)
4. Total revenue starting at (0,0) and ending at Max capacity, figure by substituting into BEQ
5. Add Total Costs starting at Fixed costs line and ending at max capacity
   6.Calc Margin of safety and label all, add dotted lines

Question 9

Contribution Per Unit (CPU)

Answer 9

• The profit made from selling each product
• Price - Variable Cost

Question 10

Calculate: Output required to make profit of $xxx

Answer 10

Profit = Revenue - Fixed costs - Variable Costs

P = PQ - FC - VCQ

Substitute to find Q. (Quantity)