1. MODIFIED BREAKEVEN ANALYSIS TOTAL COST CURVES: COSTS AVERAGE COST CURVES: COSTS FIXED COSTS VARIABLE COSTS TOTAL COSTS QUANTITY AVERAGE TOTAL COSTS AVERAGE VARIABLE COSTS AVERAGE FIXED COSTS

2. MODIFIED BREAKEVEN ANALYSIS PROFIT = TOTAL REVENUE - TOTAL COST TOTAL REVENUE = UNIT PRICE X QUANTITY SOLD TOTAL COST = FIXED COST + VARIABLE COST TOTAL REVENUE TOTAL COST VARIABLE COST FIXED COST QUANTITY SALES REVENUE AND COSTS BREAKEVEN PRICE BREAKEVEN QUANTITY BREAKEVEN POINT: TR = TC TR = VC + FC (UNITS)($/UNIT) = (UNITS)($/UNIT) + FC PRICE COST

3. MODIFIED BREAKEVEN ANALYSIS GIVEN: –FIRM DETERMINES (INTERNAL): VARIABLE COSTS FIXED COSTS –FIRMS DETERMINES (EXTERNAL): DEMAND FUNCTION (MARKET RESEARCH) BREAKEVEN UNITS: BREAKEVEN UNITS = PRICE - VARIABLE COST PER UNIT = CONTRIBUTION TO FIXED COST TOTAL FIXED COSTS PRICE - VARIABLE COST PER UNIT

4. MODIFIED BREAKEVEN ANALYSIS EXAMPLE PROBLEM: –SELECT A PRICE OF $10 OR $12 FOR PRODUCT “X” FACTS: –FIXED COST = $60,000 –VARIABLE COST PER UNIT = $6.00 –DEMAND IS LIKELY TO BE: Q = 14,000 UNITS SOLD @ $10.00 Q = 12,000 UNITS SOLD @ $12.00

5. MODIFIED BREAKEVEN ANALYSIS EXAMPLE DEMAND CURVE: 15 10 5 0 0 5 10 15 QUANTITY (K) PRICE DEMAND: 14,000 UNITS @ $10 12,000 UNITS @ $12 TR (@ $10) = 10 X 14,000 = $140,000 TR (@ $12) = 12 X 12,000 = $144,000

6. MODIFIED BREAKEVEN ANALYSIS EXAMPLE CONTRIBUTION TO FIXED COST PROCESS: @ $10.00@ $12.00 $60,000 /$4.00 = 15,000 UNITS$60,000 / $6.00 = 10,000 UNITS DEMANDED UNITS: 14,000 UNITS12,000 UNITS BREAKEVEN GREATER THANBREAKEVEN LESS THAN DEMAND - LOSE MONEYDEMAND - MAKE PROFIT BUT, HOW MUCH???

7. MODIFIED BREAKEVEN ANALYSIS EXAMPLE VARIABLE AND TOTAL COST AT BREAKEVEN (@ PRICE = $10.00) VC = 6(15,000) = $90,000 TC = 60,000 + 90,000 = $150,000 VARIABLE AND TOTAL COST OF DEMANDED UNITS: VC = 6(14,000) = $84,000 TC = 60,000 + 84,000 = $144,000 TOTAL REVENUE OF THOSE DEMANDED: TR = 10(14,000) = $140,000 PROFIT OR LOSS: LOSS = $140,000 - $144,000 = -$4,000 VARIABLE AND TOTAL COST AT BREAKEVEN (@ PRICE = $ 12.00) VC = 6(10,000) = $60,000 TC = 60,000 + 60,000 = $120,000 VARIABLE AND TOTAL COST OF DEMANDED UNITS: VC = 6(12,000) = $72,000 TC = 60,000 + 72,000 = $132,000 TOTAL REVENUE OF THOSE DEMANDED: TR = 12(12,000) = $144,000 PROFIT OR LOSS: PROFIT = $144,000 - $132,000 = +$12,000

8. TOTAL COST VARIABLE COST TOTAL REVENUE AT DEMANDED QUANTITIES- FIXED COST MODIFIED BREAKEVEN ANALYSIS EXAMPLE 150 100 50 0 0 5 10 15 20 QUANTITY (K UNITS) COST AND REVENUE (K DOLLARS) 12 14 TR @ $12 TR @ $10 $120K (BE) $150K (BE) BREAKEVEN QUANTITIES DEMANDED QUANTITIES $144K REVENUE $140K REVENUE $132K COST $144K COST

9. MODIFIED BREAKEVEN ANALYSIS EXAMPLE SENSITIVITY ANALYSIS DEMAND (REVENUE): SUPPLY (COST): UNITS PRICE TOTAL REVENUE C.T.F.C. TOTAL COST PROFIT 18,000 $6 $108,000 $0 $168,000 ($60,000) 14,000 $10 $140,000 $4 $144,000 ($4,000) 13,000 $11 $143,000 $5 $138,000 $5,000 12,000 $12 $144,000 $6 $132,000 $12,000 11,000 $13 $143,000 $7 $126,000 $17,000 6,000 $18 $108,000 $12 $ 96,000 $12,000 POINT SLOPE FORMULA (Y 1 - Y 2 ) = S (X 1 - X 2 ) (10 - 18) = S (14,000 - 6,000) S = -0.001