BREAK EVEN ANALYSIS: GROUP ASSIGNMENT #3

Team Tranquilizers

Question 1: What was Firm Us break-even volume for SULI in Period 3?

Break-even volume = Fixed total cost / Unit Margin = 4099/(325-135) = 21,574 units
What was Firm Us break-even volume for SUCK in Period 3?
Break even volume for SUCK = 1934/(193-148) = 42,978 Units
How do these volumes compare? Which one appears more stable (i.e, which product
seems on more solid ground given your break-even analysis)? Choose one.

SUCK needs more units for breaking even the marketing budget compared to SULI
SULI appears more stable as we can break even early and every additional units sold
is profitable from then

Imagine that you expect sales to decrease for SUCK by 35%, even if you hold
advertising and sales expenditures constant. What would happen to SUCKs breakeven volume and profitability? Use specific numbers to support your answer.

Break even analysis only depend on the unit margins on advertising spend, hence
even if sales were to go down by 35%, break even volume will remain the same at

42,978 units
If sales decrease by 35% and advertising and sales expenditure remain same, the
contribution amount or net profits will reduce:
o Revenue will drop by 35% to 8,033
o COGS will drop to 6,144
o Inventory Holding cost will increase (22,413 additional units to he held) to 356
o Contribution before Marketing will drop down to 1,031
o Contribution after Marketing will drop down to (903)

BREAK EVEN ANALYSIS: GROUP ASSIGNMENT #3

Team Tranquilizers

Question 2: Your team wants to decrease the price for SUCK to $260 just to increase
sales, expecting sales to reach 70,000 units at the lower price. Let us assume this
would result in an average selling price of about $174. Assume the same current
transfer cost will apply. What is your new BEV (break-even volume) if fixed costs do
not change. What kind of shape is SUCK in?
Break Even Volume = 1934/(174-148) = 74,385 Units, as the unit contribution decreases
break even volume increases. So SUCK will be in a very bad shape as it wont even be
able to recover its fixed costs with the reduced price. The company shouldnt reduce the
price to so much even if it sees an increases in volume.
Question 3: Members of your team want to increase advertising for SULI by at least
$2 million. You are hesitant. How many additional units would you need to sell (at
the $491 list price and $325 selling price) to cover the additional $2M in fixed costs
(i.e. you only want to see how many units are required to cover the $2M increase in
advertising)? Assume the transfer cost will still be $135.
Increases in Mkt fixed costs from 4.099 Million to 6.099 Million
Break Even volume for the additional $2 million spending (Ignoring inventory holding
cost for additional volume)
= 2000 / (325 135) = 10,526 Units
So with the increases marketing budget, if we expect to sell more than 10,526 units we
should go ahead with the additional spending, otherwise we shouldnt approve the
additional spending.