Contemporary Marketing
Contemporary Marketing
18th Edition
ISBN: 9780357033777
Author: Louis E. Boone, David L. Kurtz
Publisher: Cengage Learning
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Question
Chapter 13.7, Problem 1LO
Summary Introduction

To determine: The break-even point of the product

Break-even point is where the firm earns no profit and no gains.

Expert Solution & Answer
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Explanation of Solution

Break even analysis is used to determine the amount the product should be sold at a price to earn the sufficient revenue to cover the fixed and variable costs.

The breakeven point:

Company JD has annual pizza sales of $480,000, fixed costs of $190,000, average price of 2-topping pizza, and large of $11 and variable cost of $4 with profit margin of 75%

Formula to calculate the breakeven point:

Breakeven point (in units)=Total fixed costsGross margin or Contribution margin

Formula to calculate the sales price using margin method:

Sales price=CostOne minus target margin percentage=$410.75=$40.25=$16

Hence, the sales price is $16.

This price will cut the sales volume in turn customers of JD Company may be less price sensitive to a quality products.

A cost-volume-profit analysis says that even a small drop in the volume makes the gross profit to increase.

So, company JD considers investing in the area of delivery drivers, online stores, applications and others.

The fetches a fixed cost of additional $100,000. So the new breakeven point will be as below.

The breakeven point will be:

Breakeven point (in units)=Total fixed costsGross margin or Contribution marginBreakeven point (in units)=Total fixed costsSelling priceVariable cost=$190,000+$100,000$16$4=$24,167pizzas

Hence, the breakeven point is $24,167 pizzas.

Though the BEP was below the last year’s volume and below the revised sales projections, Company JD was confident in revising its average price of pizzas to $16.

This will improve the differentiation from Company D by providing various convenient options on ordering and which will lead to increase in profits.

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