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MGS 3100 Business Analysis Breakeven, Crossover & Profit Models Jan 21, 2016

MGS 3100 Business Analysis Breakeven, Crossover & Profit Models Jan 21, 2016. Breakeven. Agenda. Crossover. Pricing Model. 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:

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MGS 3100 Business Analysis Breakeven, Crossover & Profit Models Jan 21, 2016

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  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

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