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TiE Young Entrepreneurs (TYE)
A TiE-Boston Chapter Initiative
MARKETING PART II | 31 January 2009
SESSION 3: What is an Break-even Analysis
Recap of what you have learnt…
What is Marketing (4 P’s) Why do Marketing (Purpose) How to do effective Marketing
Need to develop Vision to drive business Analyze consumers by segment Focus your brand
Understand key concepts/elements to be effectiveMarket Research Competitive strategies/advantagesAdvertising & PublicityBreak-even analysis
Can you afford your marketing plan & How to calculate it
What is Break-even Analysis?
Key element of marketing plan Answers: Can you afford your Marketing
Plan? Sell enough units to cover its cost! Marketing is a fixed cost
It is not affected by the number of units sold
Break-even unit formula = Fixed operating cost / Gross profit per unit
Why Break-even Analysis
Businesses do this analysis to help them arrive at a price allow them to make some profit know when that will happen in the future
It is done for all businesses – little or big Main reason is to have some idea of
how much to sell before you can start making a profit
If the number you are trying to get is too difficult then maybe you can change it
increasing your price or cutting your cost … that is the key to the analysis
Understand this, makes you more competitive in the market place
Example: Basic Calculations
Item Description Price Calculation
Sum
Cost of Each unit $2
Sale Price of unit $4
Total Units Sold 25
Revenue [Unit Sale Price * Units Sold] $4 * 25 $100
COGS [Units Sold * Cost of Unit] $50 25 * $2
Other Variable Costs $0
Total Variable Cost [COGS + Other VC] $50 $50 + $0
Gross Profit [Revenue – Total Variable Cost] $100 - 50 $50
Total Fixed Cost (Marketing) $24
Pre-Tax Net Profit [Gross Profit – Total Fixed Cost]
$50 - $24 $26
Tax $6
Net Profit [Pre-Tax Net Profit – Tax] $26 - $6 $20
Specifics: Break-even Units
Item Description Price Calculation
Sum
Cost of Each unit $2
Sale Price of unit $4
Total Units Sold 25
Revenue [Unit Sale Price * Units Sold] $4 * 25 $100
COGS [Units Sold * Cost of Unit] $50 25 * $2
Other Variable Costs $0
Total Variable Cost [COGS + Other VC] $50 $50 + $0
Gross Profit [Revenue – Total Variable Cost] $100 * $50
$50
Gross Profit Per Unit = Total Gross Profits/Units Sold
$50/25 $2
Total Fixed Cost (Marketing) $24
Pre-Tax Net Profit [Gross Profit – Total Fixed Cost]
$50 - $24 $26
Tax $6
Net Profit [Pre-Tax Net Profit – Tax] $26 - $6 $20
Break-even Units = Fixed Operating Cost/Gross Profit Per Unit
$24/$2 $12
Change in Units Sold
Item Description Price Calculation
Sum
Cost of Each unit $2
Sale Price of unit $4
Total Units Sold 12
Revenue [Unit Sale Price * Units Sold] $4 * 12 $48
COGS [Units Sold * Cost of Unit] $24 12 * $2
Other Variable Costs $0
Total Variable Cost [COGS + Other VC] $24 $24 + $0
Gross Profit [Revenue – Total Variable Cost] $48 - $24 $24
Total Fixed Cost (Marketing) $24
Pre-Tax Net Profit [Gross Profit – Total Fixed Cost] $24 - $24 $0
Tax $0
Net Profit [Pre-Tax Net Profit – Tax] $0 - $0 $0
Gross Profit Per Unit = Total Gross Profits/Units Sold $24/12 $2
Break-even Units = Fixed Operating Cost/Gross Profit Per Unit
$24/$2 $12
At break-even point
Business operates at no profit and no loss
Any unit sold below the break-even units will bring loss to business, and
Any unit sold above the break-even units will bring profit to business
Note: Costs
Mostly all business's costs fall into Variable costs
increase directly in proportion to the level of sales in dollars or units sold. change in proportion to the activity of a business
sometimes referred to as unit-level costs since they vary with the number of units produced.
Examples: cost of goods sold (COGS), sales commissions, shipping charges, delivery charges, costs of direct materials or supplies, wages of temporary or part time employees, bonuses
Fixed costs Stays same regardless of level of sales Examples: marketing related, rent, insurance, equipment
expenses, business licenses, salary of permanent full time employees
Variable and Fixed costs combined = Total Costs
Element of dependency – normal costs
Remains, no dependency
Total Costs
UNITS
$
Fixed Costs
Variable Costs
Total Costs
Of Production
Total Revenue
& Cost Total Variable Costs
Total Fixed Costs
More
Higher
Loss
Profit
Break evenPoint
Revenue
Note on Break-even
… it requires estimating a single per-unit variable cost, and a single per-unit price or revenue, for the entire business
.. it is hard to do in a business that has a collection of products or services to sell
In a nut shell…
In the "REAL WORLD" true costs are difficult to calculate there are so many things that can go wrong mistakes that happen in production All of which skew the figures
Break-even analysis is sometimes difficult to calculate there is nothing in mathematics that allows for calculating the "COMPETITIVE ENVIRONMENT"
This is why competition may cause you to make change to lower your price, or the demand may change which means you will have to change your calculation about WHEN you break even!
Example 2: Calculation Formula: P=U(p-V)-F (P= Profit, p=price, U=units sold, V= variable costs and F=fixed costs) Selling Price (p)= $10.00, Units Sold (U) = 1,000 Assume Total fixed costs (F) = $7,700, Total variable costs (V) = $4.50/unit
To Calculate Profit P=1,000($10.00 - $4.50) - $7,700 = $5,500 - $7,700 = -$2,200 P=$5,500 - $7,700 = -$2,200
What happened? Instead of making money we have just lost $2,200. At break even the $2,200 number should be $0.
We can't make money at 1,000 units, so how many must we really sell to break even?
Fixed costs (F) are $7,700, and the price (p) is still $10.00 and our variable costs (V) are $4.50/unit This is what we need to do:
(p) price minus (V) variable costs divided into (F) fixed costs; ((p) – (V))/F $10.00 - $4.50 = $5.50 divided into $7,700 = 1,400 units
Validate $1,400($5.50) = $7,700-$7,700 = $0 If we maintain our price/expenses, we need to sell 1,400 units of our product to break even. Note: If we raise our price or reduce expenses we can sell less.
Q&A
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