Question

1. What are the unit requirements given the three parameters above? 2. Annasam’s annual unit sales average of 1,000 units for each line. Are there any marketing decisions that should be made given the above results?

Marketing Management Section 3 Problems Break-Even Analysis Annasam Company is a producer of kayaks. There are two lines of kayaks: one for professional outfitters and the second for committed recreationalists. The cost structure is as follows: Price Line Professional $4,000 Line Amateur $2,800 $900,000 $2,000 .20 VC Des Contribution Margin $2,200 15 Compute the break-even units and break-even dollar contribution needed as follows: 1. If Annasam only sells the professional line. 500 units & $2,000,00 2. If Annasam only sells the amateur line. 1125 units & $3,150,000 3. If Annasam sells both lines in equal units). about 346 units Annasam is trying to woo investors to its business, but investors would like to see at least a 15% return on investment on the professional line and 20% return on the amateur line. 1. What are the unit requirements given the three parameters above? 2. Annasam's annual unit sales average 1,000 units for each line. Are there any marketing decisions that should be made given the above results?

Answer 1

1. Unit requirements

1.If Annasam only sells the professional line

Break-even point in units= Fixed costs/Unit contribution

ie. 900000/(4000-2200)=

500

units

Break-even $=

Break-even units* S.P./unit

500 units *$ 4000=

2000000

2.If Annasam only sells the amateur line

Break-even point in units= Fixed costs/Unit contribution

ie. 900000/(2800-2000)=

1125

units

Break-even $=

Break-even units* S.P./unit

1125 units *$ 2800=

3150000

3.If Annasam sells both lines

Break-even point in units= Fixed costs/Wt. av. unit contribution

Wt.av. Unit contribution=(Wt.PL*Unit contn.PL)+(Wt.AL*Unit Contn. AL)

ie. (50%*(4000-2200))+(50%*(2800-2000))=

1300

Break-even point in units= 900000/1300=

692

units

ie.692/2=346 units of each

Break-even $=

(Break-even units* S.P./unit) of each

ie.(346*4000)+(346*2800)=

2352800

	PL	AL	50% each
Price	4000	2800	3400	(4000*50%)+(2800*50%)
VC	2200	2000
Unit Contn.	1800	800	1300
Contn/sales ratio	45%	28.57%	38.24%	13/34
(Contn. Margin ratio)

1. YES.

If only professional line is sold, it should sell

(Fixed costs,900000+ target profit, ie. 15%*investment)/45%

ie. More than 500 units, which is the BEP.

If only amateur line is sold, it should sell

(Fixed costs,900000+ target profit, ie. 20%*investment)/28.57%%

ie. More than 1125 units, which is the BEP.

If it sells both, then it will be

(Fixed costs,900000+ target profit, ie. 15%*PL inv.+20%*AL inv.)/38.24%

ie. More than 346 units of each

2. Marketing/sales promotion efforts need to be taken to sell more of professional line ----

as it's contribution margin 45% is more than that for amateur line (28.57%)

which can cover fixed costs rather more quickly & earn profits