1 / 11

Business Analysis: Breakeven, Crossover & Profit Models

Learn about breakeven analysis, pricing models, and maximizing profits through practical examples and graphs. Understand how to calculate breakeven points, determine crossover pricing, and analyze demand for optimal pricing strategies.

jcrowley
Download Presentation

Business Analysis: Breakeven, Crossover & Profit Models

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. MGS 3100Business AnalysisBreakeven, Crossover & Profit ModelsJan 21, 2016

  2. Breakeven Agenda Crossover Pricing Model

  3. Breakeven • Sales – Costs = Profit • B/E is the point at which you are not making or losing $ • Must Account for Fixed and Variable costs • Example: Suppose we own a hotel, and our rooms rent for $50 per night. Our total fixed costs are $1,000 and out Variable costs are $10 per room. What is the break-even?

  4. Breakeven • Define the random variable X. • Express Total Revenue, Fixed cost, Variable cost, Total cost, and Profit in terms of X. • Calculate Breakeven point. • Draw two graphs - one of Revenue and Total Cost against the number of rooms, the other of profit against the number of rooms.

  5. Agenda Breakeven Crossover Pricing Model

  6. Crossover • Determining the point where two alternatives yield equal results • You have the option of subcontracting to improve room quality. Fixed Costs would increase to $1800, with no change to variable costs. You will, however, be able to charge $70 per room per day. At what point will you be indifferent between your current mode of operation and the new option? • Solution: Set the profit equations equal to each other

  7. Agenda Breakeven Crossover Pricing Model

  8. Pricing Models Example • Going back to our hotel room example, suppose the demand is: Demand=200-3*Price • What price would you charge to maximize profits?

  9. Pricing Models Equation The profit equation would be: Demand = 200-3P Revenue = P(200-3P) = -3P2+200P Fixed cost = 1,000 Var Cost = 10(200-3P) Total Cost = 1,000+2000-30P Profit = -3P2+200P-1,000-2,000+30P = -3P2+230P-3,000

  10. Pricing Models Slope • Maximum profit is where the slope is zero. • Slope can be calculated by taking the derivative of the profit equation. • Slope = -6P+230 • Set the slope equation equal to zero and solve • Max profit is $38.33

  11. Pricing Models Demand • To determine demand, plug the max profit price into the demand function… • Demand = 200 – 3P • Demand = 200 -115 • Demand = 85 rooms

More Related