Break even analysis- profit maximization ppt

output,costs ,revenue relationships of a firm and profits and losses associated with different levels of output

1. Explains the output, cost, and revenue relationships over the whole range of stipulated output. Break-Even Analysis- P Analysis- R Break-Even Analysis- Profit maximization

2. Gives a preview of profit prospects to the business manager. integrates the cost and revenue estimates to ascertain the profits and losses associated with different levels of output. Explains about the volume of output at which the costs and revenues are exactly equal. Continued…..

3. Given Cost function: TC=100+10Q Revenue function: TR=15Q Break-Even output: 15Q=100+10Q 5Q=100 Q=20 Break-Even Analysis-Linear functions

4. Production beyond 20 units will yield increasing profits. Production below 20 units means the firm incurs loss. Production of 20 units is just break-even ie TR=TC conclusions

5. Break –Even Analysis-Linear Functions TR TC TVC TFC COST&REVENUE 20 OUTPUT Operating loss Operating profit

6. Relevant to short run Costs are affected only by level of output. Efficiency of factors is assumed to be constant. The sales volume and the produced output are the same . . That means what ever is produced is sold. Assumptions

7. Break-Even point = Total Fixed costs/variable profit per unit= = Total Fixed costs/Selling price-Variable cost per unit Algebraic Formula

8. Given Variable cost per unit =Rs 6 Firm’s selling price per unit =Rs10 Firm’s Total Fixed costs = Rs1,60,000 Break –Even output =1,60000/10-6 =1, 60,000/4 = 40,000 units Numerical Example of a Single Product Firm

9. Break-Even output : TR=TC Firm’s total revenue : 40,000 x10 =4,00,000 Firm’s total costs : TFC+TVC TFC =1,60,000 TVC(Total output x variable cost per unit )= 40000 x Rs 6=2,40000 TC =1,60,000+2,40,000 =4,00,000 Therefore it is proved :TR=TC Hence the above formula for Break-Even point is proved. Proof

10. Break-Even Analysis-Nonlinear Functions TC TR TC a b Q Q1 Q2 O

11. The Fig represents short run. The horizontal straight line is total fixed costs as they do not change according to the changes in the level of output. Total revenue curve starts from the origin indicating that at the beginning even with no output the fixed costs are to be born. At output OQ level, point “a” shows TC=TR , a break-even output where the losses are minimized. Analysis of the Diagram

12. At point “b” again TC=TR, showing the level of output where the amount of profits are maximized. Beyond OQ2, it is the zone of losses where TC is > TR. At output OQ1,the profit is at it’s highest. The profit zone is from OQ to OQ2. Continued….

13. What is the optimum level of output that a firm should go for ?and why? Is it judicious for the firm to stop production at OQ level of output? Justify your answer. If at all the firm stops it’s production at OQ1 level of output what implications can you analyze? At what level of output sales maximization is achieved? Self Test Questions

14. BREAK-EVEN ANALYSIS CHART

15. Quantity in UNITS Short run Total cost 800200 80808980808080200200 200 260 300 320 340 370 420 453 500 720 20 40 60 80 100 120 140 150 160 180 80

16. What is the average fixed cost of the firm at 40 units level of output? If the selling price is Rs 4, derive the break-even level of output. At what level of output does the firm earn maximum profits? What is firm’s variable cost at 60 units of output? Think Tank

17. THANK YOU