Marketing Economic Implications Worksheet

Description

Break-even analysis in economics, marketing, and cost accounting refers to the point at which total cost and total revenue are equal. A break-even point analysis is used to determine the number of units of a product or service that must be sold to cover total costs (fixed and variable costs).

This means you have covered all of your costs at the number of units sold the formula calculates.

The formula for break-even analysis is as follows:

break-even quantity = fixed costs / (sales price per unit - variable cost per unit)

Example

Your clinic wants to offer obstetrical services at your women’s center.

Assume you know that a new suite of offices will need to be designed within your existing facility to provide the service. The cost for build-out for these offices is $50,000. This is a one-time charge. This represents your fixed cost.

For each 15-minute patient appointment, assume the following costs:

· OB physician: $70

· Office staff: $20

· Office supplies: $10

The total variable cost associated with one 15-minute office visit is the sum of these charges ($70 + $20 + $10 = $100).

Assume your clinic charges $200 per 15-minute office visit per patient.

To determine the break-even point for offering OB service at your clinic, plug these numbers into the formula:

Break-even quantity = $50,000 / ($200 - $100) = $50,000 / $100 = 500 patient visits

Therefore, given the fixed costs, variable costs, and revenue gained for each patient visit, your organization would need to provide 500 OB office visits to break even during the period of one year.

Your Work

Use the following table to create your ECRHS break-even analysis. Enter the calculated work and the projected numbers, following the formulas next to the line item.

Description

A pro forma income statement predicts income. You will use this for the new or revised product or service you are recommending to East Chestnut Regional Health System (ECRHS) after one year. The income statement shows the sales ECRHS expects to achieve during that time period, along with the costs associated with that level of sales. The organization must cover the costs of products or services it delivers (cost of sales) and the marketing expenses estimated to achieve those sales. (We estimate these using 7% of total revenues.) This will produce a projected profit.

A good pro forma income statement proves out a strategy by showing the expected revenue minus the expected costs and the resulting profit. Conversely, it shows that an organization can't have $100,000 in forecast sales and $3 million in projected advertising costs because that would result in a loss.

This is a very simplified exercise to help you understand the concept of a pro forma income statement. In reality, you would provide a much more in-depth analysis of expenses. For instance, if you were hiring two new sales reps, their salaries must be factored in.

Example

Assume your projected sales revenue for one year for a new OB service is $200,000. Follow these steps to complete the pro forma income statement:

1. Take your projected revenue per visit from your break-even analysis (we used $200 per visit) x the number of visits you forecast from your projected market calculations in Part 1 of the assessment. (In this example, it might be 1,000 visits.)

2. Next calculate the cost of sales. This is the fixed cost plus total variable costs for 1,000 visits. Your total costs would be 1,000 x $100 variable cost per visit = $100,00 + the one-time construction fixed cost of $50,000 = $150,000 total costs (which is cost of sales).

Your gross profit would be $200,000 - $150,000 = $50,000.

3. Subtract your marketing cost (which we estimate at 7% x $200,000 = $14,000).This provides you with your net income ($50,000 - $14,000 = $36,000). This represents the total amount of profits you will generate in your first year.

4. Finally, calculate the net profit margin. ($36,000 / $200,000 = 0.18 or 18%). You will need to analyze if the total net income and total net profit margin fits within the objectives of your organization.

Your Work

Use the following table to create your pro forma income statement. Enter the projected numbers, following the formulas beneath the line item. Show your calculated work.

Description

Now that you have a better understanding of your market and the finances of the organization, you must consider how economics and finance can affect your marketing strategy.

Your Work

Write a 350- to 525-word analysis of how your market share analysis, your break-even calculation, and your pro forma calculation will affect the marketing strategies for ECRHS. Make sure to recommend whether to pursue this product or service and your reasoning. Begin your response on a new line.

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Copyright 2024 by University of Phoenix. All rights reserved.