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chapter1

Model Components

  • 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)
  • Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
  • 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:
  • Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
  • 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
  • Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
  • Western Clothing Company Example
  • Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
  • Model Building:
  • Break-Even Analysis (6 of 9)
  • Figure 1.2
  • Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
  • Break-Even Analysis: An increase in price (7 of 9)
  • Figure 1.3
  • Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
  • Break-Even Analysis: An increase in variable cost (8 of 9)
  • Figure 1.4
  • Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
  • Break-Even Analysis: an increase in fixed cost (9 of 9)
  • Figure 1.5

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