weekly homework of MKTG436
YellowSnowman
436_BreakEven_1.pdf
1
Break-Even Analysis
Marketers need to understand break-even
analysis because it helps them choose the
best pricing strategy and make smart
decisions about the short- and long-term
profitability of the product.
This is an analysis that tells you how many
products you need to sell to cover your costs.
Profitability
Profitability Definitions
Revenue the money we take in from sales
Cost the money it costs us to make and sell our product
Profit the money we have left over from our revenue after we pay all of our costs
Revenue - Costs = Profit
Price the money a consumer pays for one unit of product
the money we take in from one unit of product
Price x Units = Revenue
Revenue/Units = Price
2
Exercise 1
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
1. What was Stick-It-Up’s total sales revenue in August?
2. What was Stick-It-Up’s total profit in August?
3. What product contributed the most to sales revenue in August? What percentage of the sales revenue did it contribute?
4. What product contributed the most to profit in August? What percentage of the profit did it contribute?
5. If sales of magnetic white boards went up by 20%, how much more would it contribute to sales revenue? To profits?
6. Suppose that increasing sales of magnetic white boards by 20% would cost the company $500 per month in advertising expenses. Should they spend the $500 per month on additional advertising?
Exercise 1
What was Stick-It-Up’s total revenue in August?
Revenue from:
Bulletin Boards 400 x $3.00 $1,200.00
Magnetic White Boards 600 x $4.00 $2,400.00
Combination Boards 250 x $5.00 $1,250.00
Total Revenue $4,850.00
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
3
Exercise 1
What was Stick-It-Up’s total profit in August?
Cost of:
Bulletin Boards 400 x $1.00 $400.00
Magnetic White Boards 600 x $3.00 $1,800.00
Combination Boards 250 x $3.50 $875.00
Total Cost $3,075.00
Profit = Total Revenue - Total Cost = $4,850 - $3,075 = $1,775
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
What was Stick-It-Up’s total profit in August?
Profit on:
Bulletin Boards 400 x ($3.00-$1.00) $800.00
Magnetic White Boards 600 x ($4.00-$3.00) $600.00
Combination Boards 250 x ($5.00-$3.50) $375.00
Total Profit $1,775.00
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
What product contributed the most to revenue in August? What
percentage did it contribute?
Bulletin Boards $1,200.00
Magnetic White Boards $2,400.00
Combination Boards $1,250.00
Total Revenue $4,850.00
$2,400 as a % of $4,850 = $2,400/$4,850 x 100 = 49%
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
4
Exercise 1
What product contributed the most to profit in August? What
percentage did it contribute?
Bulletin Boards $800.00
Magnetic White Boards $600.00
Combination Boards $375.00
Total Profit $1,775.00
$800 as a % of $1,775 = $800/$1,775 x 100 = 45%
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
New Unit Sales = 600 + (600 x 20%) = 600 + 120 = 720
New Unit Sales = 600 x 120% = 720
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 720 $4.00 $3.00
Combination Board 250 $5.00 $3.50
What if sales of Magnetic White Boards went up by 20%?
New Revenue = 720 x $4.00 = $2,880
New Profit = 720 x ($4.00 - $3.00) = $720
Calculation Check 1
Revenue on:
Bulletin Boards $1,200.00
Magnetic White Boards $2,880.00
Combination Boards $1,250.00
Total Revenue $5,330.00
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 720 $4.00 $3.00
Combination Board 250 $5.00 $3.50
How much more would it contribute to sales revenue?
$2,880 as a % of $5,330 = $2,880/$5,330 = 54%
5
Calculation Check 1
Profit on:
Bulletin Boards $800.00
Magnetic White Boards $720.00
Combination Boards $375.00
Total Profit $1,895.00
$720 as a % of $1,895 = $720/$1,895 = 38%
How did things change when sales of MWB increased by 20%?
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 720 $4.00 $3.00
Combination Board 250 $5.00 $3.50
How much more would it contribute to profit?
What about the total amounts?
How did they change?
Total Revenue
Original Revenue $4,850
New Revenue $5,330
Change in Revenue = $480
Total Profit
Original Profit $1,775
New Profit $1,895
Change in Profit = $120
With what you know now,
should we spend an extra $500
on advertising to achieve the
20% increase in sales of
Magnetic White Boards?
1
Profitability
Profitability is based on:
• Unit Sales
• Price per Unit
• Variable Cost per Unit
Variable costs are the costs that vary with
level of production (i.e. packaging materials)
• Total Fixed Costs
Fixed costs are costs that do not vary with
production or sales level (i.e. rent, heat, interest,
executive salaries)
Unit Level & Total Level
Unit Level Total Level
Price x units sold = Revenue
Variable Cost x units sold = Cost of Goods Sold
Cost of goods sold (COGS) are the direct
costs attributable to the production of the
goods sold by a company.
2
Unit Level & Total Level
Unit Level Total Level
Price x units sold = Revenue
Variable Cost x units sold = Cost of Goods Sold
Fixed Costs x units sold = Fixed Costs
per unit
Unit Level & Total Level
Unit Level Total Level
Price x units sold = Revenue
Variable Cost x units sold = Cost of Goods Sold
Fixed Costs x units sold = Fixed Costs
per unit
Profit
Unit Level & Total Level
Unit Level Total Level
Price x units sold = Revenue
Variable Cost x units sold = Cost of Goods Sold
Fixed Costs x units sold = Fixed Costs
per unit
x units sold = Profit
3
Unit Level & Total Level
Unit Level Total Level
Price x units sold = Revenue
Variable Cost x units sold = Cost of Goods Sold
Fixed Costs x units sold = Fixed Costs
per unit
Profit x units sold = Profit
per unit
Income Statement
Sample monthly income statement:
Revenue $12,500
- Cost of Goods Sold - $7,500
- Fixed Costs - $3,520
Profit $1,480
Income Statement
Sample monthly income statement:
Revenue $12,500
Cost of Goods Sold - $7,500
Gross Margin $5,000
Fixed Costs - $3,520
Profit $1,480
Gross margin is a company's total
sales revenue minus its cost of goods sold. The
gross margin represents total sales revenue that
the company retains after incurring the direct
costs associated with producing the goods and
services sold by a company.
1
Margins and Profitability
Profitability is based on:
• Unit Sales
• Price per Unit
• Variable Cost per Unit
• Total Fixed Costs
• Contribution Margin per Unit
Margins and Profitability
We know that we are profitable when:
Revenue – COGS – Fixed Costs > 0
In other words:
Revenue – COGS > Fixed Costs
But:
Revenue – COGS = Gross Margin, right?
So, we are profitable if:
Gross Margin > Fixed Costs
Monthly income statement:
Revenue $12,500
Cost of Goods Sold - $7,500
Gross Margin $5,000
Fixed Costs - $3,520
Profit $1,480
2
Margins and Profitability
We are profitable if:
Gross Margin > Fixed Costs
We have a loss if
Gross Margin < Fixed Costs
If Gross Margin = Fixed Costs, we are breaking even.
Margins and Profitability
Revenue $100,000
COGS $60,000
Gross Margin $40,000
Fixed Costs $40,000
Profit -0-
Margins and Profitability Gross Margin is useful for profitability if we already know what unit sales are going to be.
If we know unit sales, then we know total revenue and total variable cost, so we can calculate Gross Margin.
But what if we are not sure how many units we will sell?
It might be helpful to know how much each unit we sell will contribute to covering fixed costs.
We need to know the unit-level equivalent of Gross Margin, the Contribution Margin.
3
Suppose we know:
Revenue $100,000
COGS $60,000
Gross Margin $40,000
Fixed Costs $40,000
Profit -0-
And we know that Unit Sales for this month were
10,000 units.
Can we convert this income statement to unit level?
Unit Level Income Statement
Total Level Unit Level
Revenue $100,000 ÷ 10,000 $10
COGS $60,000 ÷ 10,000 $6
Gross Margin $40,000 ÷ 10,000 $4
$10 is the price per unit.
$6 is the variable cost per unit.
And the $4 from each unit that contributes to covering
our fixed costs is the contribution margin per unit.
Contribution Margin
Total Level Unit Level
Revenue $100,000 ÷ 10,000 $10
COGS $60,000 ÷ 10,000 $6
Gross Margin $40,000 ÷ 10,000 $4
Fixed Costs $40,000
We know that with this contribution margin, if we sell
10,000 units we will break even.
What will our profit be if we sell 15,000 units?
How many units do we need to sell to get a profit of
$10,000?
4
Contribution Margin
What will our profit be if we sell 15,000 units?
Unit Level Total Level
Price $10 x 15,000 $150,000
Variable Cost $6 x 15,000 $90,000
Contribution Margin $4 x 15,000 $60,000
Fixed Costs $40,000
Profit $20,000
Contribution Margin
What will our profit be if we sell 15,000 units?
Unit Level Total Level
Contribution Margin $4 x 15,000 $60,000
Fixed Costs $40,000
Profit $20,000
Contribution Margin
How many units do we need to sell to get a profit of
$10,000?
Unit Level Total Level
Contribution Margin $4 x ? $50,000
Fixed Costs $40,000
Profit $10,000
5
Contribution Margin
How many units do we need to sell to get a profit of
$10,000?
Unit Level Total Level
Contribution Margin $4 x ? $50,000
Fixed Costs $40,000
Profit $10,000
$50,000 = 12,500 units
$4
Contribution Margin
Our contribution margin in dollars for this product is $4.
Price per Unit - Variable Cost per Unit = CM in dollars
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