Break-even Analysis Form
BREAK-EVEN ANALYSIS - 7
Figure 5
DOL
= =
400 000
500 000
0 8
,
,
.
quantity will be high). On the other hand, a plant with low fixed costs and high
variable costs will break even at lower quantities, and its profits will tend to be less
sensitive to output level.
Thus, the break-even quantity and the DOL could have significant influences on a firm
deciding whether or not to convert from an old--labor-intensive--manufacturing facility to a
more modern, automated (i.e., capital-intensive) plant.
§ Example 5. What is the degree of operating leverage at an output level where profit is
$500,000, given that TFC is $400,000?
Answer:
§ Example 6. The firm is contemplating a new investment of
)
(TFC), how much the new
AVC would have to go down for it to achieve the same profit target at twice the output
level as before? How does the DOL at the new point compare with the old DOL?
Answer: Mark the point TFC +
)
(TFC) on the vertical axis. Then mark the point TFC +
)
(TFC) +
A
on the same axis. From the output level Q
A
2
(which is twice Q
A
1
) draw the
vertical line which cuts TR
1
at B. The slope at the line through B gives the new AVC.
(Additional question: If both
)
(TFC) and the new AVC are given, what is the break even
output level with the new investment?)
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