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Study of interrelationships among a firms sales, costs, and operating profit at various levels of output Break-even point is the Q where TR = TC (Q1 to Q2 on graph)
$s
TC
TR
Profit
Q
Q2
Q1
FC
P
1 unit Q
Break-even point
Algebraic Solution
Equate total revenue and total cost functions and solve for Q TR = P x Q TC = FC + (VC x Q) TR = TC P x QB = FC + VC x QB (P x QB) (VC x QB) = FC QB (P VC) = FC QB = FC/(P VC), or in terms of total dollar sales, PQ = (FxP)/(P-VC) = ((FxP)/P)/((P-VC)/P) = F/((P/P) (VC/P)) = F/(1-VC/P)
Related Concepts
Profit contribution = P VC
The amount per unit of sale contributed to fixed costs and profit
Wholesale price per tree is $8.00 Fixed cost is $30,000 Variable cost per tree is $5.00 Solution
Q(break-even) = F/(P VC) = $30,000/($8 - $5) = $30,000/$3 = 10,000 trees
Go to Spreadsheet
400
500
23.4
25.2
562
605
600
700 800 900
26.7
28.0 29.1 30.1
641
672 698 722
Example 3: Continued
Fixed costs per acre:
Land . . . . . . . $300 Site prep . . . . 100 Annual . . . . 60 Set-up . . . . . 5 Total . . . . 465