Fixed Costs and Variable Costs -Breakeven

Simple Costing: Fixed vs. Variable Costs, Breakeven Point, and Profit Analysis

Understanding fixed costs, variable costs, breakeven point, and profit is crucial for pricing decisions and financial planning. Below is a breakdown with formulas, examples, and graphs.

1. Fixed Costs vs. Variable Costs

Total Cost (TC) Formula

• \(Q\) = Quantity produced/sold
• \(VC\) = Variable cost per unit

2. Breakeven Point (BEP)

The breakeven point is where Total Revenue (TR) = Total Cost (TC), meaning no profit or loss.

Breakeven Formula

• \(SP\) = Selling Price per unit
• \(VC\) = Variable Cost per unit

Breakeven Revenue

3. Profit Calculation

Profit occurs when Total Revenue > Total Cost.

Profit Formula

Or:

4. Graphical Representation

Breakeven Chart

Below is a cost-volume-profit (CVP) graph:

          | Revenue/Cost ($)
          |
          |   / Total Revenue (TR = SP × Q)
          |  /
          | / 
          |/________ Breakeven Point (BEP)
          |        /|
          |       / |
          |______/  |
          |    /   |
          |   /    |
          |  /     |
          | /      | Total Cost (TC = FC + VC × Q)
          |/_______|________________
          |        Fixed Cost (FC)
          |________________________
                     Quantity (Q)

%% Breakeven Analysis Graphgraph LR
graph LR
    axis[("Volume (Q) →")] -->|"Low"| Q1[Q=500]
    axis -->|"Breakeven"| Q2[Q=1,000]
    axis -->|"High"| Q3[Q=1,500]
    
    cost[("Cost/Revenue ($) ↑")] --> FC[FC=$10,000]
    cost --> TC[TC=FC + VC×Q]
    cost --> TR[TR=Price×Q]
    
    TR -->|"TR > TC → Profit"| Profit
    TC -->|"TR < TC → Loss"| Loss
    TR & TC -->|"TR = TC"| BEP["Breakeven Point"]
    
    style FC fill:#f5f5dc,stroke:#333
    style TC fill:#ffcccc,stroke:#333
    style TR fill:#ccffcc,stroke:#333
    style BEP fill:#ffff99,stroke:#333

graph LR
    FC[Fixed Cost] -->|+Variable Cost| TC[Total Cost]
    Sales[Total Revenue] -->|Breakeven| BEP((Breakeven Point))
    style FC fill:#f5f5dc,stroke:#333
    style TC fill:#ffcccc,stroke:#333
    style Sales fill:#ccffcc,stroke:#333
    style BEP fill:#ffff99,stroke:#333

Key Points:

1. Fixed Cost (FC) is a horizontal line (doesn’t change with quantity).
2. Total Cost (TC) starts at FC and slopes upward (due to VC).
3. Total Revenue (TR) starts at 0 and increases with sales.
4. Breakeven Point (BEP) is where TR = TC.
5. Profit Area = TR > TC (right of BEP).
6. Loss Area = TR < TC (left of BEP).

5. Example Calculation

Scenario:

• Fixed Costs (FC) = $10,000
• Variable Cost per unit (VC) = $5
• Selling Price per unit (SP) = $15

Breakeven Point (Units)

Breakeven Revenue

Profit if 1,500 Units Sold

6. Impact of Changing Costs & Prices

7. Practical Applications

• Pricing Strategy: Adjust \(SP\) to lower BEP.
• Cost Control: Reduce \(FC\) or \(VC\) to improve profitability.
• Profit Targets: Calculate required sales volume for desired profit.

Target Profit Formula

Conclusion

• Fixed Costs remain constant; Variable Costs change with production.
• Breakeven Point (BEP) is where revenue covers all costs.
• Profit = Revenue – Total Costs.
• Graphs help visualize the relationship between costs, volume, and profit.

Would you like a real-world case study or an Excel template for calculations? Let me know!