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1 Profit and Economic Relations between the Basic Values of the Enterprise

Costs and Revenues BEP

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Page 1: Costs and Revenues BEP

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Profit and Economic Relations between the

Basic Values of the Enterprise

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Content of 5Content of 5thth Class Class

1.1. Profit, Revenues, CostsProfit, Revenues, Costs

2.2. The Cost FunctionThe Cost Function

3.3. The Yield FunctionThe Yield Function

4.4. The Profit FunctionThe Profit Function

5.5. Break Even PointBreak Even Point

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1. Profit, Revenue, 1. Profit, Revenue, CostCostDefinitionsDefinitions Cost Cost – amount of money which – amount of money which

has to be paid for somethinghas to be paid for something RevenueRevenue – money received – money received ProfitProfit – money gained from a sale – money gained from a sale

which is more than the money which is more than the money spent on making the item sold or spent on making the item sold or on providing the service offeredon providing the service offered

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2. The Costs function2. The Costs function

= Dependence of the amount of the costs on any factors which have influence or create costs

In the strict concept

= Cost dependence on the volume (range) of PRODUCTION

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There are two types of There are two types of costs:costs: Fixed CostsFixed Costs Variable costs Variable costs (proportional, (proportional,

overproportional, overproportional, underproportional, S-curve)underproportional, S-curve)

The Costs function The Costs function oo

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The Costs functionThe Costs function

Total costs – they express the cost of Total costs – they express the cost of the the entire volume of the productionentire volume of the production

Average costs – they express Average costs – they express production costs per unitproduction costs per unit, measured , measured as a proportion of the total costs and as a proportion of the total costs and volume of a productionvolume of a production

Marginal costs - (limit, border) are the Marginal costs - (limit, border) are the costs caused by the costs caused by the addition in addition in production of one unitproduction of one unit

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The Costs functionThe Costs function

There are formulas for calculation:Total costsTotal costs

TCTC = FC + VC = = FC + VC = FC + AVC x QFC + AVC x Q FC = AFC x QFC = AFC x Q VC = AVC x QVC = AVC x Q FC = constantFC = constant

Average costsAverage costs ATC = AFC + AVC = ATC = AFC + AVC = FC / Q + AVCFC / Q + AVC AFC = FC / QAFC = FC / Q AVC = VC / QAVC = VC / Q AVC = constantAVC = constant

Marginal costsMarginal costs MC = ∆ TC / ∆Q per unitMC = ∆ TC / ∆Q per unit

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The simplest case of the total costs is LINEAR FUNCTIONS.

The Costs functionThe Costs function

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3. The 3. The Yield Function Yield Function oo

Yield Function

=

Revenues depend on the volume of sales (amount of the sold production) and the set price.

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The Yield FunctionThe Yield Function

TR = P x QTR = P x Q

TR …. Total RevenuesTR …. Total Revenues P ……. PriceP ……. Price Q ……. sold productionQ ……. sold production

There are formulas for calculation:

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If the selling price is constant throughout the production volume, the function of total revenues will be linear.

The function of average and marginal revenues will be constant, i.e. it equals the price per unit of production.

The Yield ProductionThe Yield Production

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5. The Profit Function 5. The Profit Function oo

P = R – C = R x Q – (FC + VC)

P = (P – AVC ) x Q - FC

It follows from the model cost and revenue model. The difference between revenues and costs

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6. Analysis of Break 6. Analysis of Break Even Point Even Point oo Break Even Point = Break Even Point = level of level of

production and salesproduction and sales (per period), in (per period), in which the income level is the same as which the income level is the same as the level of costs, and thus the level of costs, and thus there is there is a a neitherneither loss or a profit loss or a profit

Profit function, in Break Even Point Profit function, in Break Even Point Profit = 0, Loss = 0Profit = 0, Loss = 0

Presupposition: Linear running of the Presupposition: Linear running of the Yield and Cost functionsYield and Cost functions

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Break Even PointBreak Even Point

Critical quantity of production (Q in BEP), which separates the area of loss from profit

Profit = 0; R = CQBEP x P = FC + AVC x QBEP

QBEP = FC / (P – AVC)

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EXERCISEEXERCISE oo

The capacity of production equipment is 200 tonnes per month. Fixed costs are 150 000 CZK per month and variable costs 2 000 € per tonne. The selling price is constant 5 000 € per t.

a) What is the critical volume of production? b) When we will reach the maximum profit?

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Thank you for your attentionThank you for your attention

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