Question

Imagine you are running a new company that wants to start small and then scale. As the manager, you start out as the only full-time employee and you have a part-time support staffer and a part-time marketing employee.

1. At the beginning of your operations (year 1), the price of your product is $100. Your competitors are charging $110. Your direct costs are $60/unit ($40 labor, $20 materials). Your monthly overhead is as follows: facilities all-in $3,000, management $10,000, sales-marketing $6,000, support staff $2,500, IT-Telecom $500, accounting/legal/consulting $2,000.

What monthly volume of sales do you need to break even in year 1? ____________units/month

B) Now you are in the second year of operations. You have doubled your volume from year 1 where you exactly broke even. For year 3, you decide to expand the scale of your operation. You are hiring a second full-time manager and bringing on full time sales and marketing staff.

IIBIf you expect to double sales again from year 2 to 3 (thus quadrupling your year 1 volume), how much can you add to your staffing and management salaries and still break even? (Hint: Use the Burn section of Module C)

$______________/month

C) In year 4, competition is tightening in the market. Your competitors are now charging $100 and it is impacting your volume. With a burn rate of $48,000/month, monthly sales of 3000 units, and the same direct costs as before, what is the lowest price you could charge and still break even? (Hint: use the Pricing section of Module C)

$______________/unit

d) In year 5, you set your price at $90 and your burn rate is unchanged ($48,000). You expect to see 3600 units/month in sales. You decide to move to a more ecologically sustainable supply chain and you need to know what are the highest direct costs you can bear and still breakeven. What is the most you can pay in materials (assuming labor and other costs are unchanged)?

$______________/unit

Answer 1

Ans A-
	Sales price per unit		100
	Labor	40
	Material	20	60
	Contribution per unit		40
	Overheads
	facilities	3000
	management	10000
	sales marketing	6000
	support staf	2500
	IT telecom	500
	accounting/legal	2000	24000
	Break even sales per month	24000/40	=600
	(total overheads/contribution per unit)
	What monthly volume of sales do you need to break even in year 1? 600 units/month
Ans B-	Production in second year =600*12*2=	14400
	Production in third year =600*12*2*2=	28800
	Contribution per unit	40
	total Contribution (40*28800)	1152000
	Monthly overheads	24000
	yearly overheads (24000*12)	288000
	Additional staff
	second full time manager (12*10000)	120000
	second full time sales staff (12*6000)	72000
	Total overhead	480000
	(288000+120000+72000)
	Profit Per annum	672000
	profit Per month	56000
	To have still break even $ 56000 need to be added in staffing cost per month
Ans C-	Monthly sales 3000 (per annum 3000*12)	36000 units
	Direct cost (as before)	480000
	Burn rate per annum	576000
	(48000*12)
	Net overhead after burn rate	-96000
	Variable cost per unit=60
	total Variable cost (60*36000)	2160000
	Net variable cost after burn rate	2064000
	Net variable cost per unit after burn rate	57.33333
	(=2064000/36000)
	hence sales price can be set to the least @ $57.33 per unit to breakeven
Ans D-	In year 5
	sales price per unit $90
	Units per year (3600*12)
	sales (3600*12*90)	3888000
	varable cost (60*3600*12)	2592000
	Contribution (sales-variable cost)	1296000
	Highest direct cost can be beared is $ 1296000 to have break even.	1296000
	Hence per unit will be 1296000/432000= $3 per unit