Prices, Margins, and Breaking Even

Financial analysis of new technology can get fairly sophisticated, and detailed business plans can contain a variety of means of projecting revenues, but the most useful starting point for thinking about the finances of a technology oppormnity is simple breakeven analysis. 

Simple breakeven analysis turns on building a simple linear model relating various costs and price. Say we get a price P per unit of product for which we pay a fixed cost F and a variable cost V. If we sell n units of the product, we may calculate the net revenue R received as follows  

Breakeven occurs at that volume rib where net revenue / = 0. This results in a relationship between breakeven volume, fixed cost, and contribution margin as follows  

Finally, total revenue may be written in terms of M and the breakeven point by substituting Equation (11.2) into (11.1)  

In words, the net revenue can be calculated as the excess volume over breakeven times the unit contribution margin. 

---