STUDENT/TEAM
Thomas McClure
Break-Even Analysis
To:
Marketing Assistant Trainees
From: Porter Gamble, Vice President of Marketing
RE:
Understanding the Operating Performance and Profitability
Turn your attention to the operating performance of Allstar Brands. In this exercise, you will look
at break-even analysis for the purpose of evaluating marketing activities, which varies from the
traditional approach used in accounting courses. When making decisions about investing in
product changes, increasing or decreasing prices, investing in distribution channel activities, or
increasing promotional activities, marketing managers need to understand how these changes
will affect company profitability and what risk will be associated with these actions. Break-even
analysis provides information that will help you understand the impact of proposed changes.
Break-even is the point at which the company generates enough revenue to cover all of its
variable and fixed costs. It is at this point that no profit is made (profit = 0). Refer to your Income
Statement for fixed costs. Refer to your Sales Report or the “What If…” analysis for unit sales.
These instruments will help you obtain figures for the break-even analysis. The break-even
formula tells you how many units need to be sold in order to cover all expenses. The formula is
relatively simple and is shown below:
Company Break-Even (Units):
= Total Fixed Costs / (Selling Price per unit - Variable Cost per unit)
While this formula is fine for the overall company, marketing managers may be more interested
to learn how their marketing budgets affect the break-even point. So you may want to use the
following formula:
Marketing Budget Break-Even (Units):
= (Total Fixed Costs + Total Marketing Expense) / (SP per unit – VC per unit)
14B14B
Note: SP = Manufacturer Sales / units
or:
SP = MSRP x (1 – vol. disc%)
VC = Variable Cost
VC = (PA+COGS) / units
or: VC = Unit Cost + SP x PA%
PA = Promotional Allowance
SP = Selling Price
Break-Even in Sales Dollars:
= (Break-Even Unit Sales) x (Selling Price per Unit)
Complete the tables on the next page.
(continued on next page…)
STUDENT/TEAM
Thomas McClure
Use the data from the research provided in your current period of the MarketShare simulation
to complete the tables below.
The information you need comes from the COMPANY Income and Performance Summary
reports. You will need to calculate the UNIT selling price (SP), all UNIT variable costs (VC),
marketing expenses, and fixed costs. List the required information in the chart below.
Break-Even Data
Description
$
Unit Volume
55.8 M
Unit Selling Price (SP)
3.84
Promotional Allowance (PA)
27.9
Cost of Goods Sold (COGS)
Unit Variable Cost (VC)
Total Marketing Expenses
(Promo., Adv., Sales Force,
Admin.)
Total Fixed Costs
54
1.47
25.8 M$
56 M$
Use the data you just calculated and the break-even formulas (provided on the front page of this
exercise) to fill in the information below.
Company Break-Even (Units)
2 pts
Total Fixed Costs (FC)
–
Unit Selling Price (SP)
$56 M
3.84
– 1.47
Variable Costs per Unit (VC)
=
$56 M
$2.37/unit
=
Break-Even
(Units)
= 23.6 M
Units
(continued on next page…)
STUDENT/TEAM
Thomas McClure
Marketing Budget Break-Even (Units) 2 pts
Total Fixed Costs (FC)
Selling Price per Unit (SP)
$56 M
$3.84
+
Total Marketing Expenses
–
Variable Costs per Unit (VC)
+ $25.8 M
– $1.47
=
$81.8 M
=
Break-Even
(Units)
= 34.5 M
Units
$2.37
Sensitivity Analysis
Use the information provided below to understand how your company’s break-even point
changes and the implications for market share:
1. You have requested an additional $8,000,000 from Senior Management to run an
advertising campaign promoting Allround. What is the new break-even level of sales? 2pts
(56+25.8+8)/(3.84-1.47)= 37.9 M units
2. A competitor has dropped its price by $0.50 causing you to consider matching their
price cut. What would be your new break-even? 2 pts
(56+25.8)/((3.84-0.5)-1.47)= 43.7 M Units