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MBA 7020 Business Analysis Foundations Breakeven, Crossover

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Breakeven, Crossover & Profit Models. June 13, 2005. MBA7020_02.ppt/June 13, ... Crossover. Determining the point where two alternatives yield equal results ... – PowerPoint PPT presentation

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Title: MBA 7020 Business Analysis Foundations Breakeven, Crossover


1
MBA 7020 Business Analysis Foundations
Breakeven, Crossover Profit Models June 13,
2005
2
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
Crossover
Pricing Model
Breakeven
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
Crossover
Pricing Model
Breakeven
8
Pricing Models Example
  • Going back to our hotel room example, suppose the
    demand is
  • Demand200-3Price
  • What price would you charge to maximize profits?

9
Pricing Models Equation
  • The profit equation would be
  • Demand 200-3P
  • Revenue P(200-3P) -3P2200P
  • Fixed cost 1,000
  • Var Cost 10(200-3P)
  • Total Cost 1,0002000-30P
  • Profit -3P2200P-1,000-2,00030P
  • -3P2230P-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 -6P230
  • 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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