¶ … assist the Pringly Division to set up the appropriate pricing for the new product. To achieve this objective, the paper carries out the break-even analysis that will assist the company to fix the appropriate pricing and quantity for the new product.
The company had not been able to achieve its sales target in the past making the company to lose some profits. Thus, the company has decided to reduce its budget to avoid disappointment of the past. Thus, the company has set up different targets to follow and the targets will be evaluated to assist the company to make appropriate decision on the pricing of the new product:
The first strategy is to fix the selling price of the new product to $170 per unit carrying the annual fixed costs of $20,000,000.
The second alternative is to increase the cost of promotion and advertising and set the selling price of the new product to $220. However, the fixed costs will increase to $25,000,000 because the marketing department is adamant that the company needs to increase the advertising costs to achieve the sales target.
The table below reveals the three possibility levels of customer demands.
Estimated demand (units)
Estimated probability (units)*
0.25
0.5
0.25
Financial Analysis
The first step is to set up the selling price, the fixed costs and variable costs per unit.
Selling price
Fixed costs
Variable Cost per unit
$170
$20,000,000
$35
$220
$25,000,000
$35
Thus, the report will provide the break-even points at each level for the first and second strategies as being revealed below:
Break-even point for the first strategy based on the estimated demand of 150,000 units.
Break-even point for the first strategy based on the estimated demand of 180,000 units.
Break-even point for the first strategy based on the estimated demand of 200,000 units.
Break-even point for the second strategy based on the estimated demand of 150,000 units.
Break-even point for the second based on the estimated demand of 180,000 units.
Break-even point for the second strategy based on the estimated demand of 200,000 units.
Thus, the paper calculates the breakeven point at different levels using the data in the table below:
When Estimated Demand = 150,000 units
First Strategy
Second Strategy
New Product
Estimated Costs
Estimated Costs
Variable cost per unit
$35
$35
Fixed cost
20, 000,000
$25,000,000
Selling price per unit
$170
$220
Budget volume
150,000
150,000
When Estimated Demand = 180,000 units
First Strategy
Second Strategy
New Product
Estimated Costs
Estimated Costs
Variable cost per unit
$35
$35
Fixed cost
20, 000,000
$25,000,000.
Selling price per unit
$170
$220
Budget volume
180,000
180,000
When Estimated Demand = 200,000 units
First Strategy
Second Strategy
New Product
Estimated Costs
Estimated Costs
Variable cost per unit
$35
$35
Fixed cost
20, 000,000
$25,000,000.
Selling price per unit
$170
$220
Budget volume
200,000
200,000
Using the excel software; the paper computes the break-even point at each level:
Break-even point at the estimated Demand of 150,000 units
First Strategy
Second Strategy
Break-even point volume
148,148
135,135
Break-even point sale
$25,185,185
$29,729,730
Profits at budgeted volume
$250,000
$2,750,000
Break-even point at the estimated Demand of 180,000 units
First Strategy
Second Strategy
Break-even point volume
148,148
135,135
Break-even point sale
$25,185,185
$29,729,730
Profit at budgeted volume
$4,300,000
$8,300,000
Break-even point at the estimated Demand of 200,000 units
First Strategy
Second Strategy
Break-even point volume
148,148
147,058.82
Break-even point sale
$25,185,185
$29,729,730
Profit at budgeted volume
$7,000,000
$12, 000,000
The results of the break-even analysis reveal that the company will achieve the target profit of more than $4,000,000 with the estimated demand of 180,000 units and 200,000 units using the first and second strategy. However, the company will not achieve the target profit of more than $4,000,000 with the estimated demand of 150,000 units using the first and second strategy. The detailed breakdown of the break even analysis is revealed in the Appendix 1.
The paper uses the financial analysis in the table below to support this assertion:
Profits derived at the First and Second Strategy when the estimated Demand is 150,000 units
First Strategy
Second Strategy
Sales (150,000 x $170)
$25,500,000
Sales (150,000 x $220)
$33,000,000
Variable cost per unit (150,000 x35)
5,250,000
5,250,000
Fixed Costs
20,000,000
25,000,000
Total Costs
25,250,000
25,250,000
30,250,000
30,250,000
Profits
$250,000
$2,750,000
Profits derived at the First and Second Strategy when the estimated Demand is 180,000 units
First Strategy
Second Strategy
Sales (180,000 x $170)
$30,600,000
Sales (180,000 x $220)
$39,600,000
Variable cost per unit (180,000 x35)
6,300,000
6,300,000
Fixed Costs
20,000,000
25,000,000
Total Costs
26,300,000
26,300,000
31,300,000
31,300,000
Profits
$4,300,000
$8, 300,000
Profits derived at the First and Second Strategy when the estimated Demand is 200,000 units
First Strategy
Second Strategy
Sales (200,000 x $170)
$34,000,000
Sales (200,000 x $220)
$44,000,000
Variable cost per unit (200,000 x35)
7,000,000
7,000,000
Fixed Costs
20,000,000
25,000,000
Total Costs
27,000,000
27,000,000
32,000,000
32,000,000
Profits
$7,000,000
$12, 000,000
The results of the financial analysis reveal that the company will achieve the target profits of more than $4,000,000 with the estimated demands of 180,000 and 200,000 units using the first and the second strategy. However, the company will make more profits using the second strategy than the first strategy at the estimated demand of 180,000 units or 200,000 units.
3. Computation of the Margin of Safety
The concept margin of safety is defined as the extent the projected sales exceed the break-even volume or the break-even sales. The formula used to calculate the concept of margin of safety is as follows:
"Margin of Safety = Budgeted Sales ? Break-even Sales"
The paper delivers the calculation the MOS (margin of safety) in the first and second strategy based on the estimated sales of:
150,000 units,
180,000 units and 200,000 units.
Margin of Safety based on the First Strategy and Second Strategy
First Strategy
Second Strategy
Projected Sales (150,000 units)
$25,500,000
$33,000,000
Break-even sales
$25,185,185
$29,729,730
Margin of safety
$314,815
$3,270,270
Margin of safety %
1%
5%
Projected Sales (180,000 units)
$30,600,000
$39,600,000
Break-even sales
$25,185,185
$29,729,730
Margin of safety
$5,414,815
$9,870,270.00
Margin of safety %
9%
12%
Projected Sales (200,000 units)
$34,000,000
$44,000,000
Break-even sales
$25,185,185.00
$29,729,730
Margin of safety
$8,814,815.00
$14,270,270.00
Margin of safety %
13%
16%
Analysis of the MOS reveals that the first strategy with the estimated demand of the 150,000 units will deliver the lowest contribution margin of 1%. However, the second strategy with the estimated of the 200,000 units will deliver the highest contribution margin of 16%.
4. The company should go ahead by investing in the new product because the company will reach the targeted profits of more than $4,000,000 by using the first and second strategy of the estimated sales of 180,000 units and 200,000 units.
5. Large companies producing a range of product could use the analysis to estimate the break-even point for each of product and profit that will be realized for each product. The analysis will assist the company to estimate the contributing margin for each product.
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