Break-even Analysis Form
BREAK-EVEN ANALYSIS - 2
2
We still assume that both P and AVC do not vary with output level.
Q
TFC Target Profit
P AVC
BE
=
+
−
Q
BE
=
−
= =
20 000
7 5
20 000
2
10 000
, ,
,
Q
=
+
−
= =
10 000 5 000
5 2
15 000
3
5 000
, , ,
,
by
2
P.Q* = Target profit + TFC + AVC.Q*
hence
TABLE 1 Effects of TFC, AVC, and P on break-even output
Variable Direction of Change Break-even Output
Total Fixed Cost
(e.g., cost of equipment)
Up Up
Down Down
Average Variable Cost
(e.g., cost of material)
Up Up
Down Down
Product Price Up Down
Down Up
§ Example 1. Calculate the break-even output for TFC = $20,000, P = $7, and AVC = $5
Answer:
§ Example 2. Suppose TFC = $10,000, P = $5, AVC = $2. What is the output necessary
to earn $5000 total profit? What is the “average contribution margin”?
Answer:
ACM = P ! AVC = $3
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