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Ceecono Lecture 3

The document covers Cost-Volume-Profit Analysis, detailing various cost terminologies such as fixed, variable, and marginal costs. It explains the relationship between demand, price, total revenue, and profit, including how to determine breakeven points under different scenarios. Additionally, it provides examples illustrating the concepts discussed.

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sarahgwynethzulueta
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35 views24 pages

Ceecono Lecture 3

The document covers Cost-Volume-Profit Analysis, detailing various cost terminologies such as fixed, variable, and marginal costs. It explains the relationship between demand, price, total revenue, and profit, including how to determine breakeven points under different scenarios. Additionally, it provides examples illustrating the concepts discussed.

Uploaded by

sarahgwynethzulueta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Lecture 3

• Cost-Volume-Profit Analysis
Cost Terminology
Incremental
Fixed Cost Variable Cost Marginal Cost
Cost

Standard
Direct Cost Indirect Cost Cash Cost
Cost

Opportunity Life-Cycle
Book Cost Sunk Cost
Cost Cost

Recurring Nonrecurring
Costs Costs
The General Economic
Environment
Consumer Producer
Goods and Goods and Utility
Services Services

Perfect
Necessities Luxuries
Competition

Monopoly
General Price-Demand
Relationship
constants

• b is the amount by which demand increases for each unit decrease in p


The Total Revenue Function
• TR – total revenue
• p – price
• D – number of units sold

By applying:

From calculus, the demand that will produce the maximum total revenue
can be obtained by solving:
Total Revenue Function as a Function of
Demand
Costs
• Fixed costs remain constant over a wide range of activities
• Variable costs vary in total with the volume of output

where:
Demand is a function of price
Total Revenue
CT
Maximum Profit

Loss
Profit
Cost and Revenue

CV

CF

D’1 D* D’2
D
Volume (Demand)
In order for a profit to occur, two conditions must be met:
• Optimal value of D that maximizes profit is:
Demand is a function of price
Total Revenue
CT
Maximum Profit

Loss
Profit
Cost and Revenue

CV

CF

D’1 D* D’2
D
Volume (Demand)
Breakeven Point
Two scenarios for finding breakeven
points:
 Demand is a function of price
 Price and demand are independent of each
other
For an economic breakeven point to occur:

 Since this is a quadratic equation, we can


solve for breakeven points D1’ and D2’ (the roots of the equation):
Example 1 - Demand is a function of price
Example 1 - Demand is a function of price
Example 1 - Demand is a function of price
Example 1 - Demand is a function of price

17
Spreadsheet Solution
0.02

prepared by: mktb/nrrj


18
prepared by: mktb/nrrj
19
 Price and demand are independent
of each other
When the price per unit for a product or
service can be represented more simply as
TR being independent of demand and is
greater than the variable cost per unit, a
single breakeven point results. Then, under
Cost and Revenue ($)

the assumption that demand is immediately


Profit met, total revenue (TR) = p · D.
CT
Breakeven Point

Loss

prepared by: mktb/nrrj


CF

D
D’
Volume (Demand)

20
Example 2 – Price and demand are
independent of each other

21
prepared by: mktb/nrrj
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prepared by: mktb/nrrj
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Lecture 3
• Cost-Volume-Profit Analysis

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