Marketing II: Break-Even Analysis

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Marketing II: Break-Even Analysis

  1. 1. TiE Young Entrepreneurs (TYE) A TiE-Boston Chapter Initiative MARKETING PART II | 31 January 2009 SESSION 3: What is an Break-even Analysis                                    
  2. 2. Recap of what you have learnt… <ul><li>What is Marketing (4 P’s) </li></ul><ul><li>Why do Marketing (Purpose) </li></ul><ul><li>How to do effective Marketing </li></ul><ul><ul><li>Need to develop Vision to drive business </li></ul></ul><ul><ul><ul><li>Analyze consumers by segment </li></ul></ul></ul><ul><ul><ul><li>Focus your brand </li></ul></ul></ul><ul><ul><li>Understand key concepts/elements to be effective </li></ul></ul><ul><ul><ul><li>Market Research </li></ul></ul></ul><ul><ul><ul><li>Competitive strategies/advantages </li></ul></ul></ul><ul><ul><ul><li>Advertising & Publicity </li></ul></ul></ul><ul><ul><ul><li>Break-even analysis </li></ul></ul></ul><ul><ul><ul><ul><li>Can you afford your marketing plan & </li></ul></ul></ul></ul><ul><ul><ul><ul><li>How to calculate it </li></ul></ul></ul></ul>
  3. 3. What is Break-even Analysis? <ul><li>Key element of marketing plan </li></ul><ul><li>Answers: Can you afford your Marketing Plan? </li></ul><ul><li>Sell enough units to cover its cost! </li></ul><ul><li>Marketing is a fixed cost </li></ul><ul><ul><li>It is not affected by the number of units sold </li></ul></ul><ul><li>Break-even unit formula = </li></ul><ul><ul><li>Fixed operating cost / Gross profit per unit </li></ul></ul>
  4. 4. Why Break-even Analysis <ul><li>Businesses do this analysis to help them </li></ul><ul><ul><li>arrive at a price </li></ul></ul><ul><ul><li>allow them to make some profit </li></ul></ul><ul><ul><li>know when that will happen in the future </li></ul></ul><ul><li>It is done for all businesses – little or big </li></ul><ul><li>Main reason is to have some idea of </li></ul><ul><ul><li>how much to sell before you can start making a profit </li></ul></ul><ul><ul><li>If the number you are trying to get is too difficult </li></ul></ul><ul><ul><li>then maybe you can change it </li></ul></ul><ul><ul><ul><li>increasing your price or cutting your cost </li></ul></ul></ul><ul><li>… that is the key to the analysis </li></ul>Understand this, makes you more competitive in the market place
  5. 5. Example: Basic Calculations Sum Calculation Price Item Description $26 - $6 $50 - $24 $100 - 50 $50 + $0 25 * $2 $4 * 25 $20 Net Profit [Pre-Tax Net Profit – Tax] $6 <ul><ul><li>Tax </li></ul></ul>$26 Pre-Tax Net Profit [Gross Profit – Total Fixed Cost] $24 <ul><ul><li>Total Fixed Cost (Marketing) </li></ul></ul>$50 Gross Profit [Revenue – Total Variable Cost] $50 <ul><ul><li>Total Variable Cost [COGS + Other VC] </li></ul></ul>$0 <ul><ul><ul><li>Other Variable Costs </li></ul></ul></ul>$50 <ul><ul><ul><li>COGS [Units Sold * Cost of Unit] </li></ul></ul></ul>$100 Revenue [Unit Sale Price * Units Sold] 25 Total Units Sold $4 Sale Price of unit $2 Cost of Each unit
  6. 6. Specifics: Break-even Units $20 $26 - $6 Net Profit [Pre-Tax Net Profit – Tax] $6 <ul><ul><li>Tax </li></ul></ul>$24 <ul><ul><li>Total Fixed Cost (Marketing) </li></ul></ul>$26 $50 - $24 Pre-Tax Net Profit [Gross Profit – Total Fixed Cost] $50 + $0 $50 <ul><ul><li>Total Variable Cost [COGS + Other VC] </li></ul></ul>25 * $2 $50 <ul><ul><ul><li>COGS [Units Sold * Cost of Unit] </li></ul></ul></ul>$0 <ul><ul><ul><li>Other Variable Costs </li></ul></ul></ul>Sum Calculation Price Item Description $24/$2 $50/25 $100 * $50 $4 * 25 $12 Break-even Units = Fixed Operating Cost/Gross Profit Per Unit $2 Gross Profit Per Unit = Total Gross Profits/Units Sold $50 Gross Profit [Revenue – Total Variable Cost] $100 Revenue [Unit Sale Price * Units Sold] 25 Total Units Sold $4 Sale Price of unit $2 Cost of Each unit
  7. 7. Change in Units Sold $12 $24/$2 Break-even Units = Fixed Operating Cost/Gross Profit Per Unit $0 $0 - $0 Net Profit [Pre-Tax Net Profit – Tax] $0 <ul><ul><li>Tax </li></ul></ul>$0 $24 - $24 Pre-Tax Net Profit [Gross Profit – Total Fixed Cost] $24 <ul><ul><li>Total Fixed Cost (Marketing) </li></ul></ul>$24 + $0 $24 <ul><ul><li>Total Variable Cost [COGS + Other VC] </li></ul></ul>$0 <ul><ul><ul><li>Other Variable Costs </li></ul></ul></ul>12 * $2 $24 <ul><ul><ul><li>COGS [Units Sold * Cost of Unit] </li></ul></ul></ul>Sum Calculation Price Item Description $24/12 $48 - $24 $4 * 12 $2 Gross Profit Per Unit = Total Gross Profits/Units Sold $24 Gross Profit [Revenue – Total Variable Cost] $48 Revenue [Unit Sale Price * Units Sold] 12 Total Units Sold $4 Sale Price of unit $2 Cost of Each unit
  8. 8. At break-even point <ul><li>Business operates at no profit and no loss </li></ul><ul><li>Any unit sold below the break-even units will bring loss to business, and </li></ul><ul><li>Any unit sold above the break-even units will bring profit to business </li></ul>
  9. 9. Note: Costs <ul><li>Mostly all business's costs fall into </li></ul><ul><li>Variable costs </li></ul><ul><ul><li>increase directly in proportion to the level of sales in dollars or units sold. </li></ul></ul><ul><ul><ul><li>change in proportion to the activity of a business </li></ul></ul></ul><ul><ul><li>sometimes referred to as unit-level costs since they vary with the number of units produced. </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><li>Fixed costs </li></ul><ul><ul><li>Stays same regardless of level of sales </li></ul></ul><ul><ul><li>Examples: marketing related, rent, insurance, equipment expenses, business licenses, salary of permanent full time employees </li></ul></ul><ul><li>Variable and Fixed costs combined = Total Costs </li></ul>Element of dependency – normal costs Remains, no dependency
  10. 10. Total Costs Fixed Costs Variable Costs Total Costs Of Production Total Revenue & Cost Total Variable Costs Total Fixed Costs Loss Profit Break even Point Revenue UNITS $ More Higher
  11. 11. Note on Break-even <ul><li>… it requires estimating a single  per-unit variable cost, and a single per-unit price or revenue, for the entire business </li></ul><ul><li>.. it is hard to do in a business that has a  collection of products or services to sell </li></ul>
  12. 12. In a nut shell… <ul><li>In the &quot;REAL WORLD&quot; true costs are difficult to calculate </li></ul><ul><ul><li>there are many things that can go wrong </li></ul></ul><ul><ul><li>mistakes can happen </li></ul></ul><ul><ul><li>All that can affect the calculation numbers </li></ul></ul><ul><li>Break-even analysis is sometimes difficult to calculate </li></ul><ul><ul><li>mathematics does not allow for </li></ul></ul><ul><ul><li>calculating &quot;COMPETITIVE ENVIRONMENT&quot; </li></ul></ul><ul><li>This is why competition may </li></ul><ul><ul><li>cause you to make change like lower your price , or </li></ul></ul><ul><ul><li>the demand itself may change </li></ul></ul><ul><li>What does this mean? </li></ul><ul><li>You will have to change your calculation about WHEN you break even! </li></ul>
  13. 13. Example 2: Calculation <ul><li>Formula: P=U(p-V)-F </li></ul><ul><li>(P= Profit, p=price, U=units sold, V= variable costs and F=fixed costs) </li></ul><ul><li>Selling Price (p)= $10.00, Units Sold (U) = 1,000; Revenue = 10,000 </li></ul><ul><li>Assume Total fixed costs (F) = $7,700, Total variable costs (V) = $4.50/unit </li></ul><ul><ul><li>To Calculate Profit </li></ul></ul><ul><li>P=1,000($10.00 - $4.50) - $7,700 = $5,500 - $7,700 = -$2,200 </li></ul><ul><li>P=$5,500 - $7,700 = -$2,200 </li></ul><ul><ul><li>What happened? </li></ul></ul><ul><li>Instead of making money we have just lost $2,200. </li></ul><ul><li>At break even the $2,200 number should be $0. </li></ul><ul><ul><li>We can't make money at 1,000 units, so how many must we really sell to break even? </li></ul></ul><ul><li>Fixed costs (F) are $7,700, price (p) is still $10.00 and variable costs (V) are $4.50/unit </li></ul><ul><li>This is what we need to do to calculate breakeven: </li></ul><ul><li>Breakeven Point = Fixed Costs/(Unit Selling Price - Variable Costs) </li></ul><ul><li>Or take your fixed costs, divided by your price, minus your variable costs </li></ul><ul><li>(p) price minus (V) variable costs = X; Fixed Costs/X = Breakeven units </li></ul><ul><li>$10.00 - $4.50 = $5.50; $7,700/$5.50 = 1,400 units </li></ul><ul><li>New Revenue desired to break even= $ 14,000 ($10*1,400) </li></ul><ul><li>  Validate your break even calculation to see if we get 0: </li></ul><ul><li>1,400($10-4.50) = $7,700; $7,700 - $7,700 = 0 (no profit or loss) </li></ul><ul><li>If we maintain our price/expenses, we need to sell 1,400 units of our product to break even. </li></ul><ul><li>Note: If we raise our price or reduce expenses we can sell less. </li></ul>
  14. 14. Q&A <ul><li>? ? ? ? ? </li></ul>
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