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 PriceUnit 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. A 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:

Break-even Analysis

PRODUCT 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 300 thousand

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?