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Model Components

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• Model Components
• Fixed Cost (cf) - costs that remain constant regardless of number of units produced.
• Variable Cost (cv) - unit production cost of product.
• Volume (v) – the number of units produced or sold
• Total variable cost (vcv) - function of volume (v) and unit variable cost.

• Model Building: Break-Even Analysis (2 of 9)

Model Components

• Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

• Model Components
• Total Cost (TC) = total fixed cost plus total variable cost.
• Profit (Z) = difference between total revenue vp (p = unit price) and total cost, i.e.

• Model Building: Break-Even Analysis (3 of 9)

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• Model Building: Break-Even Analysis (4 of 9)

• Computing the Break-Even Point
• The break-even point is that volume at which total revenue equals total cost and profit is zero:

• The break-even point

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• Model Building:
• Break-Even Analysis (5 of 9)

• Example: Western Clothing Company
• Fixed Costs: cf = $10000
• Variable Costs: cv = $8 per pair
• Price : p = $23 per pair
• The Break-Even Point is:
• v = (10,000)/(23 -8)
• = 666.7 pairs

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• Break-Even Analysis: Computer solution Excel

• Western Clothing Company Example

• Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

• Model Building:
• Break-Even Analysis (6 of 9)

• Figure 1.2

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• Break-Even Analysis: An increase in price (7 of 9)

• Figure 1.3

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• Break-Even Analysis: An increase in variable cost (8 of 9)

• Figure 1.4

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• Break-Even Analysis: an increase in fixed cost (9 of 9)

• Figure 1.5