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- 1. Intro to Management (tutorial 1)<br />1<br />Break-Even at Target Profit<br />Daniel Zhao<br />
- 2. Learning Objective<br />Marketing Terms<br />Basic Calculations used in the analysis of marketing problems<br />Intro to Management (tutorial 1)<br />2<br />
- 3. Contribution<br />The funds available to the seller of an item after subtracting the variable costs associated with it are referred to as contribution.<br />Unit contribution: the contribution per each item sold.<br />Contribution = Sales – Variable Costs<br />Intro to Management (tutorial 1)<br />3<br />
- 4. Equations of Contribution Margin<br />Contribution Margin (CM)<br />Sales Price - Variable Cost = CM per unit<br />Revenue - Total Variable Costs = CM in total<br />Contribution Margin Ratio (CM%)<br />Sales Price – Variable Cost<br /> Sales Price<br />Intro to Management (tutorial 1)<br />4<br />
- 5. Contribution : calculation example<br />For example, we sell a unit of a product at a price of $100, and the variable manufacturing cost of that unit is $30; in addition, it costs us $3 for shipping and we paid 5% commission to salespeople. <br />Total variable cost: $30 + $3 + $5 = $38<br />Contribution: $100 – $38 = $62<br />Intro to Management (tutorial 1)<br />5<br />
- 6. Break-Even <br />Break-even(BE) means that our revenue is just enough to pay for both the variable and the fixed costs we have incurred, but only that. We have no profit, we have no losses; we have only broken even.<br />BE = Total fixed costs ÷ unit contribution<br />Intro to Management (tutorial 1)<br />6<br />
- 7. Break-Even: calculation example <br />If the contribution is $62, and fixed costs are $100,000<br />BE = $100,000 ÷ $62 = 1,613<br />The break-even point here is 1,613 units<br />Intro to Management (tutorial 1)<br />7<br />
- 8. Profit Impact<br />Unit × Units – Fixed<br />Contribution Produced & Sold Costs <br />= Profit Impact<br />For example: $62 × $2,000 – 1,000 = $24,000<br />Why not just call it plain profit? …<br />Intro to Management (tutorial 1)<br />8<br />
- 9. Because…<br /> there may be a few other costs yet to be charged against the product.<br /> assume our target profit is $50,000, thus we add an additional cost to fixed cost<br />Calculation: <br />(Fixed + Profit + Additional ) ÷ Unit Contribution<br /> Cost Impact Fixed Cost<br /> = Req. Volume<br />($100,000 + 24,000 + 50,000) ÷ $62 = 2806<br />this means we have to make and sell 2806 units to yield the same profit<br />Intro to Management (tutorial 1)<br />9<br />
- 10. Break-Even at Target Profit<br />Break-Even Point (Units) = <br /> Fixed Costs + Target Profit<br /> Unit Contribution<br />Intro to Management (tutorial 1)<br />10<br />
- 11. Question<br />Sales Price/Unit $75<br />Unit Variable Cost (45)<br />Unit Contribution $30<br />Fixed Costs = $200,000<br />Target Profit = $100,000<br />What should be the Break-Even unit to achieve a target profit at $100,000?<br />Intro to Management (tutorial 1)<br />11<br />
- 12. Answer:<br />Break-Even Units =<br />$200,000 + $100,000<br /> $75 – $45<br /> = 10,000 units<br />Intro to Management (tutorial 1)<br />12<br />
- 13. Break-Even Chart<br />Intro to Management (tutorial 1)<br />13<br />
- 14. Intro to Management (tutorial 1)<br />14<br />When fixed costs decrease by $20,000, break-even decreases by 4,000 units ($200,000).<br />
- 15. B-E Calculation with Multiple Products<br />For a company with more than one product, sales mix is the relative combination in which a company’s products are sold.<br />Different products have different selling prices, cost structures, and contribution margins.<br />Intro to Management (tutorial 1)<br />15<br />
- 16. B-E Calculation Example for Multiple Products<br />Intro to Management (tutorial 1)<br />16<br />
- 17. Weighted-average<br />Intro to Management (tutorial 1)<br />17<br />$200 × 62.5%<br />
- 18. Intro to Management (tutorial 1)<br />18<br />Break-even<br />point<br />=<br /> Fixed Costs + Weighted-Average <br />Unit Contribution Margin<br />$170,000 ÷ $ 331.25 <br />= 514 units<br />
- 19. Questions?<br />End of the tutorial<br />Intro to Management (tutorial 1)<br />19<br />

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