Show formulas and steps please.

BREAKEVEN ANALYSIS

5.

You own a 10 bedroom Bed and Breakfast

With the following,

$ 10,000 per month mortgage payment

$ 3,000 per month for the gardener and housekeeper

$ 7.00 per room for soap, towels etc.

$ 10.00 per room desired Net Profit

Assume a 30 day month

SOLVE FOR THE FOLLOWING:

1. The selling price per room per night AND the monthly breakeven point.

FC + SC = $13,000 (10,000 + 3,000) 13,000 30 10 = $43.33/room per day

VC = $7

NP = $10

Selling Price = TFC + VC + NP $43.33 + $7 + $10 = $60.33/room/night

Breakeven = Total Fixed Costs Contribution Margin = Selling Price - Var. Cost

Contribution margin

CM = $60.33 - $7.00 = $53.33

* BE = 13,000 = 243.76 or 244 rooms per month. **Capacity = 244 300 = 81%

$53.33

2. The monthly breakeven point if you raise the selling price calculated in A above by $15.00.

SP = $60.33 + $15.00 = $75.33 BE = $13,000 = 191*/rooms/mth or 63 % capacity

CM = $75.33 - $7.00 = $68.33 $ 68.33

* For breakeven point - you must round up to the next whole number

**In the service sector, you usually convert the Breakeven point in units sold to capacity which

is the percentage of the maximum capacity

3. The monthly breakeven point if you lower the selling price calculated in A above by $5.00.

SP = $60.33 - $5.00 = $55.33 BE = $13,000 = 269*/rooms/mth or 91% capacity*

CM = $55.33 - $7.00 = $48.33 $48.33

* Round up to next whole number

d. Which of the 3 prices would you charge? What factors should you consider?

The answer is it depends on many factors such as demand, positioning strategy and timing. Breakeven doesn't take into account demand so it is not accurate to say charge the highest price because you will breakeven faster and make a profit - the problem is that if no one is willing to pay that price, then you will never breakeven. So with the example above, you would say I'm going to charge $75.33 per room per night because it's the highest price but if you have a lot of competition, an elastic consumer market or there isn't any demand at that price, then you will not breakeven and it is not the right price. Analyze your market demand first and then decide on the price.

e. What would your selling price and breakeven point be if you wanted to pay

yourself $35,000 per year? Refer to A above for the original costs.

You will add your salary to the Fixed costs because you now have to cover these costs too and consider it in your selling price.

Salary = $35,000 12 = $2917/month TFC/month = $13,000 + $2917= $15,917

Selling Price Cont. Marg Breakeven

a. $60.33 $53.33 299 rms/99% cap.

b. $75.33 $68.33 233 rms/78% cap.

c. $55.33 $48.33 330 rns/110% cap.

Which price to charge? See explanation in C above. Obviously, you can't charge $55.33 per night because your breakeven is 110% capacity and 100% capacity is maximum.

BREAKEVEN ANALYSIS

6.

You own a 10 bedroom Bed and Breakfast

With the following,

$ 12,000 per month mortgage payment

$ 4,000 per month for the gardener and housekeeper

$ 9.00 per room for soap, towels etc.

$ 20.00 per room desired Net Profit

Assume a 30 day month

SOLVE FOR THE FOLLOWING:

a. The selling price per room per night AND the monthly breakeven point.

b. The monthly breakeven point if you raise the selling price calculated in A

above by $12.00.

c. The monthly breakeven point if you lower the selling price calculated in A

above by $3.00.

d. Which of the 3 prices would you charge? What factors should you consider?

e. What would your selling price and breakeven point be if you want to pay

yourself $50,000 per year?

PRICE BUNDLING

7.

Your flower shop has the following menu of options to choose from:

1. Custom arrangement: $ 45.00
2. House plant: $ 40.00
3. Cash and Carry: $ 25.00

Bundle A, B, C $100.00

With:

Before bundling:

100 consumers buying A

80 consumers buying B

200 consumers buying C

Total Revenue:

After bundling:

80 buying only A

50 buying only B

150 buying only C

100 buying Bundle A, B, C

Total Revenue:

Additional revenue with bundling:

PRICE BUNDLING

8.

Your hair salon has the following menu of options to choose from:

A. Hair cut: $ 30.00

B. Color: $ 45.00

C. Blow dry and styling: $ 20.00

4. Massage $ 50.00
5. Manicure $ 25.00
6. Pedicure $ 35.00

G. Bundle A, B, C $ 85.00

H. Bundle D, E, F $100.00

With:

Before bundling:

100 consumers buying A

80 consumers buying B

200 consumers buying C

75 consumers buying D

300 consumers buying E

250 consumers buying F

Total Revenue:

After bundling:

80 buying only A

50 buying only B

150 buying only C

60 buying only D

225 buying only E

200 buying only F

100 buying Bundle A, B, C

200 buying Bundle D, E, F

Total Revenue:

Additional revenue with bundling: