Question

Break-even and Profitability analysis You are the proud owner of a sock store. You sell one type of sock, but in thousands of colours. Before you set the price of the sock, you must conduct break-even analysis and profitability analysis. The cost of your operation are: Rent: 5000 Salary: 5000 Advertising: 10,000 Cost of socks wholesale: 1 The price for comparable socks at other stores ranges from $1 to $6, Calculate the breakeven point for each price level: Fixed Cost |Cost / UNIT Break even (units) 4/3 1. M 2 tk Variable 3. Contribution (1-2) Mee SP $2 $1 $3 $1 $4 $1 $$ $1 $6 $1 20,000 20,000 20,000 20,000 20,000 So... which price should you charge? Using profitability analysis, and market research figures, you can estimate the most profitable price level given that demand changes with price. FC (4) VC (5) 3. Total Revenge Total Cost Total Profit 1. Vente 2. Market Pe SP Demand (units) $2 30000 $3 25000 24000 SS 15000 $6 5000 20.000 20,000 20,000 20,000 20,000 Sensitivity Analysis: (an application of unit contribution) Changes in a variable such as as a component of the marketing mix can change the total contribution of a good service. Suppose you are investigating the impact of additional spending on adding additional sock stores. Market research has identified for you estimated sales given the number of stores. Using a table such as the following can help D O -

Answer 1

Part 1

Column 1	Column 2	Column 3	Column 4	Column 5
Selling price	Unit variable cost	Contribution (1-2)	Fixed cost	Break even (units)
$                2	$                 1	$                        1	$       20,000	20,000
$                3	$                 1	$                        2	$       20,000	10,000
$                4	$                 1	$                        3	$       20,000	6,667
$                5	$                 1	$                        4	$       20,000	5,000
$                6	$                 1	$                        5	$       20,000	4,000

Part 2

Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7
Selling price	Demand market	Total revenue (1 x 2)	Fixed cost	Variable cost (Column 2 x $1)	Total cost (4+5)	Total profit (3-6)
$                2	30,000	$             60,000	$       20,000	$      30,000	$        50,000	$        10,000
$                3	25,000	$             75,000	$       20,000	$      25,000	$        45,000	$        30,000
$                4	24,000	$             96,000	$       20,000	$      24,000	$        44,000	$        52,000
$                5	15,000	$             75,000	$       20,000	$      15,000	$        35,000	$        40,000
$                6	5,000	$             30,000	$       20,000	$         5,000	$        25,000	$          5,000

I will charged the price of $4 because at that price, maximum profit will be possiable.

Part 3

	Column 1	Column 2	Column 3	Column 4
No. of additional stores	Cost for additional stores	Estimated number of socks sold	Total Contribution (Column 2 x $3) ($4-$1=$3)	Net contribution (3-1)
2	$      10,000	50,000	$           150,000	$     140,000
3	$      20,000	60,000	$           180,000	$     160,000
4	$      30,000	66,000	$           198,000	$     168,000
5	$      40,000	68,000	$           204,000	$     164,000
10	$   100,000	75,000	$           225,000	$     125,000

Part 4

	Optimistic	Most likely	Pessimistic
Units sold	40,000	50,000	60,000
Sales (Units sold * 2)	$      80,000	$           100,000	$     120,000
Less: fixe costs	$      90,000	$             90,000	$       90,000
Net profit (loss)	$    (10,000)	$             10,000	$       30,000