Question

Break-even Analysis :

Break-even analysis attempts to determine the volume of sales necessary for a manufacturer to cover costs, or to make revenue equal costs. It is helpful in setting prices, estimating profit or loss potentials, and determining the discretionary costs that should be incurred. The general formula for calculating break-even units is:

Break-even Units = ( Total fixed costs ) / ( Unit selling price - Unit variable cost )

In StratSim, total fixed costs can be broken into discretionary marketing expenditures, and fixed costs for plant and overhead. The selling price is the MSRP less the dealer discount, and the cost of materials and labor make up the variable cost. In this assignment, you will allocate fixed costs across a portfolio of products and calculate the break-even units for each product.

A firm’s production capacity is 1.5 million units, with annual fixed costs of $3.2 billion for depreciation, plant maintenance, corporate marketing, and general overhead. Additional values for the three vehicles produced and sold by the firm are shown in the table below:

	VEHICLE X	VEHICLE Y	VEHICLE Z
MSRP	$ 15,999	$20,999	$25,999
Dealer Discount	10%	12%	15%
Variable Cost	$11,799	$13,599	$16,899
Adv. & Promo.	$35 million	$50 million	$70 million
Prev. Unit Sales	400 thousand	600 thousand	300thousand

1. How will you allocate the fixed costs across the products?

2. Calculate the break-even units for each product, showing the intermediate calculations for the allocated fixed costs and selling price (dealer invoice).

3. What impact does a 10% drop in MSRP have on the break-even point for each vehicle?

4. Using the original MSRP, recalculate break-even if advertising and promotion expense for each product is doubled.

5. What impact might the introduction of a new product in your vehicle line have on fixed costs and the break-even calculation?

Why I did not ask you to answer question #1?

a) Just use the previous unit sales per vehicle: 400k for vehicle X, 600K for vehicle Y, and 300K for vehicle Z = 1.3 million units.

b) You can pro-rate the fixed costs $3.2BB over each vehicle (X, Y, and Z) and also use the Adv and Promo per each vehicle as another fixed cost associated to each vehicle.

c) for example:

If the sales of X, Y, and Z were 100, 200, and 300 = 600

And total fixed costs are $600MM

The fixed costs allocation will be:

For X: $600 x (1/6) = $100MM

For Y: $600 x(2/6) = $200MM

For Z: $600 * 3/6 = $300MM

Answer 1

SOLUTION >

Point 1&2)=

PRODUCT	VEHICLE X	VEHICLE Y	VEHICLE Z
MSRP	$ 15,999	$20,999	$25,999
Dealer Discount	10%	12%	15%
Sales after Discount	$14,399.10	$18479,12	$22099.15
Variable Cost	$11,799	$13,599	$16,899
CONTRIBUTION	2600.1	4880.12	5200.15
Adv. & Promo.	$35 million	$50 million	$70 million
Prev. Unit Sales	400 thousand	600 thousand	300thousand

Total Fixed Cost = 3,20,00,00,000/1300000 = 2461.5384 / unit of sales

fixed cost allocated to vehicle X = 2461.5384*400000= $984615384.61

Total Fixed Cost for Vehicle X = $984615384.61+3500000(ad.and promotion expenses)=988115384.61

Break even Points in Units =Fixed Cost / Contribution/unit= 988115384.61/2600.1=380030 units (roundoff)

Vehicle Y = 2461.5384*600000=1476923076.91

Total Fixed Cost for Vehicle = 1476923076.91+5000000=1481923076.91

Break Even Point for Vehicle Y = 1481923076.91/4880.12=303665 units

Vehicle Z = 2461.5384*300000=738461538.45

Total Fixed for Vehicle Z = 738461538.45+7000000=$745461538.45

Break even Point = Total fixed Cost/ contribution per unit= $745461538.45/5200.15=143355 units

* Assumed that allocation of common fixed cost of 3.2 billion allocated based on prev. number of unit sold.

3) 10% drop in MSRP than also 10% drop on contribution per unit >

Vehicle X= sale price per unit *90%- discount @ 10% - variable Cost= 15999@90%-$14399.10*10%- $11799= 1160.19

Break Even Point =

Hence new Break Even Point = 988115384.61/1160.19=851685 units

same for Vehicle Y = 1481923076.91/3032.208= 488728 units

Vehicle Z = $745461538.45/2990.235=249299 units

5) Introduction of a newa new product in your vehicle line have on fixed costs may reduced the break even point of all products as it would be distributed to 4 products now.

4)Using the original MSRP, recalculation break-even if advertising and promotion expense for each product is doubled

Vehicle X=$984615384.61+7000000/2600.1= 381376 units

Vehicle Y = 1476923076.91+10000000/4880.12= 304690 units

Vehicle Z = 738461538.45+14000000/5200.15=144700 units

result may be little vary due to roundingoff

Kindly improve by writing in proper $ .