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The problem above is cast as one of maximizing profit, although it can be cast slightly differently, with the same result. If the demand D exceeds the provided quantity q, then an opportunity cost of ( D − q ) ( p − c ) {\displaystyle (D-q)(p-c)} represents lost revenue not realized because of a shortage of inventory.
All units produced are sold (there is no ending finished goods inventory). When a company sells more than one type of product, the product mix (the ratio of each product to total sales) will remain constant. The components of CVP analysis are: Level or volume of activity. Unit selling prices; Variable cost per unit; Total fixed costs
In Cost-Volume-Profit Analysis, where it simplifies calculation of net income and, especially, break-even analysis.. Given the contribution margin, a manager can easily compute breakeven and target income sales, and make better decisions about whether to add or subtract a product line, about how to price a product or service, and about how to structure sales commissions or bonuses.
"Gross margin" is often used interchangeably with "gross profit", however, the terms are different: "gross profit" is technically an absolute monetary amount, and "gross margin" is technically a percentage or ratio. Gross margin is a kind of profit margin, specifically a form of profit divided by net revenue, e.g., gross (profit) margin ...
where marginal revenue equals marginal cost. This is usually called the first order conditions for a profit maximum. [2] A monopolist will set a price and production quantity where MC=MR, such that MR is always below the monopoly price set. A competitive firm's MR is the price it gets for its product, and will have Price=MC. According to Samuelson,
The reorder point (ROP), also reorder level (ROL) or "optimal re-order level", [1] is the level of inventory which triggers an action to replenish that particular inventory. It is a minimum amount of an item which a firm holds in stock, such that, when stock falls to this amount, the item must be reordered.
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Equating this to zero to find the minimum gives Q = 2.5, at which level of output average variable cost is 53.75. Thus if the market price of the product drops below 53.75, the firm will choose to shut down production. The long run shutdown point for a competitive firm is the output level at the minimum of the average total cost curve.