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  • 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. 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 effective
        • Market Research
        • Competitive strategies/advantages
        • Advertising & Publicity
        • Break-even analysis
          • Can you afford your marketing plan &
          • How to calculate it
  • 3. 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
  • 4. 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
  • 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
      • Tax
    $26 Pre-Tax Net Profit [Gross Profit – Total Fixed Cost] $24
      • Total Fixed Cost (Marketing)
    $50 Gross Profit [Revenue – Total Variable Cost] $50
      • Total Variable Cost [COGS + Other VC]
    $0
        • Other Variable Costs
    $50
        • COGS [Units Sold * Cost of Unit]
    $100 Revenue [Unit Sale Price * Units Sold] 25 Total Units Sold $4 Sale Price of unit $2 Cost of Each unit
  • 6. Specifics: Break-even Units $20 $26 - $6 Net Profit [Pre-Tax Net Profit – Tax] $6
      • Tax
    $24
      • Total Fixed Cost (Marketing)
    $26 $50 - $24 Pre-Tax Net Profit [Gross Profit – Total Fixed Cost] $50 + $0 $50
      • Total Variable Cost [COGS + Other VC]
    25 * $2 $50
        • COGS [Units Sold * Cost of Unit]
    $0
        • Other Variable Costs
    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. 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
      • Tax
    $0 $24 - $24 Pre-Tax Net Profit [Gross Profit – Total Fixed Cost] $24
      • Total Fixed Cost (Marketing)
    $24 + $0 $24
      • Total Variable Cost [COGS + Other VC]
    $0
        • Other Variable Costs
    12 * $2 $24
        • COGS [Units Sold * Cost of Unit]
    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. 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
  • 9. 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
  • 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. 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
  • 12. In a nut shell…
    • In the "REAL WORLD" true costs are difficult to calculate
      • there are many things that can go wrong
      • mistakes can happen
      • All that can affect the calculation numbers
    • Break-even analysis is sometimes difficult to calculate
      • mathematics does not allow for
      • calculating "COMPETITIVE ENVIRONMENT"
    • This is why competition may
      • cause you to make change like lower your price , or
      • the demand itself may change
    • What does this mean?
    • You will have to change your calculation about WHEN you break even!
  • 13. 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; Revenue = 10,000
    • 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, price (p) is still $10.00 and variable costs (V) are $4.50/unit
    • This is what we need to do to calculate breakeven:
    • Breakeven Point = Fixed Costs/(Unit Selling Price - Variable Costs)
    • Or take your fixed costs, divided by your price, minus your variable costs
    • (p) price minus (V) variable costs = X; Fixed Costs/X = Breakeven units
    • $10.00 - $4.50 = $5.50; $7,700/$5.50 = 1,400 units
    • New Revenue desired to break even= $ 14,000 ($10*1,400)
    •   Validate your break even calculation to see if we get 0:
    • 1,400($10-4.50) = $7,700; $7,700 - $7,700 = 0 (no profit or loss)
    • 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.
  • 14. Q&A
    • ? ? ? ? ?