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Mk021_s13_BE-Practice-Problems (3).docx

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MKTG 1021

MK-021: Marketing Principles Professor Salisbury Spring 2013 Break-even Exercises More break-even exercises are available on the interactive toolkit: 1. Assume a retailer has fixed costs of $10,000, a unit variable cost of $20, and a 50% retail margin. a. How many units must be sold for her to break-even? b. If she has a target profit of $200,000, how many units must she sell to achieve the target profit? (1) 2. You have a great idea for a game which would run on anApple iPhone. You contemplate writing the software yourself in your spare time. You would need to buy a $50 book which teaches you how to become a programmer and also a $2000 computer program which allows you to write software for theApple iPhone. After you write the software, you would sell it through an online retailer owned by a friend. This retailer would charge you 50% of the retail price of each copy of software sold. After analyzing theApple iPhone software market and the previous track record of your retailer pal, you estimate that you would sell 20,000 copies of the software. a. What retail price will you need to charge to break even? b. Does your break-even analysis suggest your plan is a good one? (2) 3. The manufacturer ofAromello, a new body lotion, sells it directly to retailers who take a 40% margin. The retail price ofAromello is $5 per bottle. Industry sales forAromello and other products of its type are 25 million units annually; Aromello has 20% of the market. The manufacturer’s fixed costs, including all expenses but advertising, amount to $3 million per year. The raw materials of each bottle ofAromello cost 50 cents, while packaging, bottling, and all other variable costs (including shipping, breakage, insurance…) are another 50 cents. The annual advertising budget is $2 million. a. What is the unit contribution ofAromello for the manufacturer? b. What is the break-even sales volume? c. How much of a profit, if any, is the manufacturer making currently? d. If advertising were raised from its present level to $3 million annually, what market share would Aromello need to break-even? (3) (4) Imagine that you are an entrepreneur planning to enter the gourmet soy-based burger market. One of your partners developed an expected sales forecast of 150,000 units in the first year (note that a “unit” is a burger). The cost of ingredients and labor for making one burger is $.97. The estimated overhead fixed costs of making burgers for 12 months (for things such as rent, utilities, health insurance, etc.) will total $140,000. You are planning to sell each burger for $1.99. This is your best estimate of what the average consumer will pay for your soy-burger. (a) If you charge $1.99 for your burger, how many burgers will you have to sell to break even in the first year? (b) Will you break even in the first year? What is your expected profit or loss? (c) You’re feeling a little nervous about whether your sales forecast is accurate. What if your colleague overestimated the demand? What if the economy slows down? Lucky for you, another partner has been doing additional research and discovered that because Bostonians are concerned with their health, they are willing to pay up to $2.79 for a gourmet burger of the top quality you propose. What is the break even point when the unit price is raised to $2.79? (4) (5) Alocal livestock producer, Family Farms, utilizes compost waste to develop an organic fertilizer product. The fertilizer is prepared for retail sale in 50 pound bags. The retail sales price is $5.00 per bag. The average variable cost per bag is $2.80 and average annual fixed costs are $60,000. (a) What number of bags must be sold in order for Family Farms to break-even within two years? (b) The owner of Family Farms crunched some numbers and developed a sales forecast for the next three years as follows: Year 1: 25,000 bags Year 2: 30,000 bags Year 3: 35,000 bags Based on the sales forecast, when will Family Farms break even? (5) (6) You are considering opening up a Coffee Shop. You have determined that the level of fixed costs (salaries, rent, utilities) necessary to run your coffee shop on a monthly basis is $9,000. In addition, a cup of coffee, which you sell for $1.50, costs you $0.75 for the bulk coffee beans, filters, water, and cup. (a) How many cups of coffee do you have to sell every month to cover your fixed costs and break even? (b) Your fixed cost estimate was based on being open 6 days a week, 8 hours a day. This converts roughly to 200 hours a month, so how many cups of coffee per hour would you need to sell to break even? Does this seem feasible? (c) You’re considering raising prices to increase profitability. You consider charging $1.75 per cup. How would that affect your breakeven point? How many more or fewer cups of coffee will you need to break even? (d) You decide that one way to improve your prospects for profitability is to serve a more premium coffee blend at a higher price, with a larger unit contribution. You’re considering selling a selection of gourmet coffees, priced at $2.85 per cup, with a 60% contribution margin. This means positioning your Shop as more “upscale,” and therefore you’ll need to spend an additional $1,000 per month in overhead fixed costs to create a more upscale café experience for your customers (e.g., nicer décor, a better location with higher rent, etc.). If you do that, what would be the breakeven quantity? How much coffee would you need to sell to make a profit of $5,000 per month? (e) If you set a goal to sell 7,000 cups of coffee per month (which is about 35 cups per hour), what price would you need to charge in order to break even each month? What price would you need to charge in order to make a profit of $5,000 per month? (6) (7) Sales revenues at Oil Change Co. are the amounts earned from servicing cars. Oil Change Co. charges one flat fee of $24 for performing the oil change service. For $24 the company changes the oil and filter, adds needed fluids, adds air to the tires, and inspects engine belts. At Oil Change Co. the following items have been identified as variable expenses. Next to each item is the variable expense per car or per oil change: Motor oil $ 5.00 Oil filter 3.00 Grease, washer fluid 0.50 Supplies 0.20 Disposal service 0.30 Total variable expenses $ 9.00 per car At the present time no other service is provided and the $24 fee is the same for all automobiles regardless of engine size. The other expenses at Oil Change Co. (rent, heat, etc.) will not increase with each additional car serviced. The following items have been identified as fixed expenses: Labor including payroll taxes and benefits $1,200 Rent and utilities for the building it uses 700 Depreciation, office and professional, training, other 500 Total fixed expenses per week $2,400 (a) What is the contribution margin per car (or per oil change)? (b) What is the breakeven quantity for Oil Change Co.? (c) Let's say that the owner of Oil Change Co. needs to earn a profit of $1,200 per week rather than merely breaking even. How many automobiles need to be serviced to achieve that goal? (d) Andy Capp, the owner of Oil Change Co., has identified an opportunity to generate new revenue for his business. He will sell the side of his building as advertising space, where advertisers can paint billboard-style ads for their company on the side of the building (imagine a large Pennzoil Oil company ad, or a Coca-Cola ad on the side of the building). This new business opportunity will generate $200 per week in additional revenues. How many automobiles would Oil Change Co. need to service in order to break even under this business scenario? (7) Answer Key (8) 1. Selling price = Unit variable cost = $20 = $40 1- percentage margin 1 - 50% Unit margin = $40 - $20 = $20 BEV = $10,000 = 500 units $20 To achieve a profit of $200,000: Revenue - Variable Costs - Fixed Costs = Prof
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