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Break Even Analysis Break-Even Analysis • Homework take up – Mark-Up Analysis – Fixed Costs – Variable Costs Break-Even Analysis • This is the very first step in calculating the price at which to sell a product or service • Marketers will play with different prices in order to see how many sales need to be made in order to make the companies cover all of their costs • In order to calculate the Break-Even Analysis – Need to know Variable Costs (VC) & Fixed Costs (FC) Break-Even Analysis • The number of units that a business must sell at a given price to cover its costs • Once the variable costs are covered – the rest of the “gross profit” goes to pay off the fixed costs – Gross profit is the amount the company makes on every unit sold (selling price – purchase price) Break-Even Analysis • A teddy-bear manufacturing company sells its bears to retailers for an average price of $18. The variable costs are $3 per bear. The company’s fixed costs are $150 000. How many bears need to be sold before the teddybear manufacturer turns a profit? Break-Even Analysis • • • • BREAK EVEN POINT (BEP) = fixed costs / gross profit BEP = 150 000 / (18-3) BEP = 150 000 / 15 BEP = 10 000 • Therefore, after selling 10 000 bears, the company will turn a profit Break-Even Analysis • (Sales Price) * (# of Units) = (Variable Costs) * (# of Units) + Fixed Costs • 18x = 3x + 150 000 • 18x -3x = 150 000 • 15x = 150 000 • x = 10 000 • Therefore, the company needs to sell 10 000 bears to turn a profit. Break-Even Analysis • Graphing Break-Even Analysis Dollar Value – MATH TIME!!! (go back to grade 9 or 10 math) – You will graph both the revenue and the costs – Bear Example COSTS = 3x + 150 000 300 000 REVENUES = 18x 200 000 100 000 10 000 # of Units Break-Even Analysis • Another example: - A new pizza place has opened up across the street from BCI. Each piece of pizza costs them $0.75 of materials to make. The business paid $50 000 for ovens, the building, advertising and other fixed costs. They expect to sell roughly 100,000 pieces of pizza in their first year of operation. - Based on their estimates, how much should they charge in order to make their money back in the first year? Break Even Analysis • The company must decide if the break-even point is realistic or not. • If not there are many things that can be done – Reduce the Variable Costs – Increase the Price – Decrease the selling price to increase the demand – Increase the fixed costs in order to stimulate demand • Increase Advertising Economies of Scale • The more products a company makes, the lower the cost of product of each item – Picture a new company that makes its own playing cards – each pack may cost nearly $10 to produce – But Bicycle makes theirs for pennies per pack Diseconomies of Scale • Remember: Getting bigger isn’t always better • At some point – a company becomes too big in order to run efficiently – Have a hard time responding to the demands of their consumers & controlling the quality of the product (American Auto Industry) Break-Even Assignment