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:

Total fixed costs can be broken into discretionary marketing expenditures (such as sales force and advertising budget) and fixed costs for plant and overhead. The selling price is the MSRP less the volume discount, and the unit cost of goods sold, and allowance expense make up the variable cost. Use break-even analysis as a check against a plan to launch a new product, and to assess the impact of higher fixed costs from an increase in capacity.

The firm has an existing product with an advertising and promotion budget of $25.0 million, and projected sales of 115 million units. They are launching a new product with a budget of $20.0 million and estimated sales of 10 million units in the first year. The sales force expense of $10 million has been allocated equally between the products, with 90% of the plant overhead to the existing product and 10% to the new product. Additional values for each product are shown in the table below:

1. How might the results of your break-even calculation affect the marketing of the newproduct? What other factors besides break-even should you consider?

Total Fixed Cost Break-even Units Unit Selling Price-Unit Variable Cost Total Fixed Cost Break-even Units Unit Selling Price-Unit Variable Cost