A zero profit activity level
Q = Quantity produced and sold TFC = Total fixed costs AVC = Average variable cost nc = Profit contribution
On a per-unit basis, profit contribution equals price minus average variable cost (nc = P - AVC ). Profit contribution can be applied to cover fixed costs and then to provide profits. It is the foundation of cost-volume-profit analysis.
One useful application of cost-volume-profit analysis lies in the determination of breakeven activity levels. A breakeven quantity is a zero profit activity level. At breakeven quantity levels, total revenue (P X Q) exactly equals total costs (TFC + AVC X Q):
Total Revenue = Total Cost
It follows that breakeven quantity levels occur where
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