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 - Net Contribution Total Contribution = $3 - GPCM Oarch (52-vc) cost for additional stores 2 = 10,000 3= 20,000 4= 30,000 5= 40,000 10=100,000 Estimated number of socks sold 50,000 60,000 66,000 68,000 75,000 Dealing with Uncertainty You are thinking of opening a specialized video store. Should you? Your market researcher has given you the following scen jo. If the idea really catches on she thinks that you will rent 60,000 videos the first year. If it doesn't really catch on, you will rent 40,000. It probably will rent 50,000 videos. The phper video is $2. Optimistic Most Likely Pessimistic Sales LALT (82) Fixed costs Net profit 90,000 90.000 90,000 Probability You've gone back to the market researcher with the question: what is the probability that the optimistic scenario is the right one. She tells you that there is a 25% chance that the optimistic scenario will happen, a 70% probability that the "most likely scenario" will happen and a 5% probability that the worst case scenario comes true. Calculate expected profits for your firm given these odds