Question

2 2 41 5 | Break-even analysis attempts to determine the volume of sales necessary for a manufacturer to cover costs, or to make revenue equal costs. It is helpful in setting prices, estimating profit or loss potentials, and determining the discretionary costs that should be incurred. The general formula for calculating break-even units is: Break-even = (Total Fixed Costs) / (Unit Selling Price - Unit Variable Cost] In StratSim; total fixed costs can be broken into discretionary marketing expenditures, and fixed costs for plant and overhead. The selling price is the MSRP less the dealer discount, and the cost of materials and labor make up the variable cost. In this assignment, you will allocate fixed costs across a portfolio of products and calculate the break-even units for each product. A firm's production capacity is 1.5 million units, with annual fixed costs of $3.2 billion for depreciation, plant maintenance, corporate marketing, and general overhead. Additional values for the three vehicles produced and sold by the firm are shown in the table below: Vehicle X Vehicle Y Vehicle z MSRP $15,999 $20,999 $25,999 Dealer Discount 1096 12% 15% Variable Cost $11,799 $13,599 $16,899 Advertising & Promotion $35 million $50 million $70 million Previous Unit Sales 400,000 units 600,000 units 300,000 units 1 How will you allocate the fixed costs across the products?

Answer 1

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Total fixed costs - discretionary marketing expenses, fixed cost for plant and overhead

Variable cost = Selling price in MSRP- Dealer disciunt- cost material and labor

Question 1
	Vehicle X	Vehicle Y	Vehicle Z
Discretionary marketing expenditures
Adverting &Promotion	35,000,000	50,000,000	70,000,000
Annual fixed cost for plant,Corp marketing&Gen Marketing	3,200,000,000	3,200,000,000	3,200,000,000
TOTAL FIXED COST	3,235,000,000	3,250,000,000	3,270,000,000

• These are costs that will not vary with production levels.
• Fixed cost will be allocated based on the annual one incurred to produce the three products. The same amount is incurred across the product lines.
• Adverting &Promotion are considered as part of discretionary marketing expenses.

Question 2.
Break even in units =	Total fixed cost
	Unit selling price - Unit variable cost
Unit variable cost =	Selling price in MSRP- Dealer disciunt- cost material and labor
	Vehicle X	Vehicle Y	Vehicle Z
MSRP	15,999	20,999	25,999
Dealer Discount	1,600	2,520	3,900
variable costs	11,999	13,599	16,899
Net unit variable cost	2,400	4,880	5,200
Contribution margin = MSRP-Net var.cost	13,599	16,119	20,799
Break Even in Units	237,887	201,627	157,220

Question 3.
Impact of 10% drop in MSRP
	Vehicle X	Vehicle Y	Vehicle Z
MSRP	15,999	20,999	25,999
10% Drop	1,600	2,100	2,600
New MSRP	14,399	18,899	23,399
Dealer Discount	1,440	2,268	3,510
variable costs	11,999	13,599	16,899
Net unit variable cost	960	3,032	2,990
New Contribution margin = MSRP-Net var.cost	13,439	15,867	20,409
New Break Even in Units	240,719	204,829	160,224
Conclusion Remarks.
As seen from the above calculations, a drop in MSRP by 10% affects the net unit variable cost by decreasing it and break even point incraeses.
The fixed cost remain constant

Question 4.
New BEP in doubling Adverting & Promotion
	Vehicle X	Vehicle Y	Vehicle Z
Discretionary marketing expenditures
Adverting &Promotion	70,000,000	100,000,000	140,000,000
Annual fixed cost for plant,Corp marketing&Gen Marketing	3,200,000,000	3,200,000,000	3,200,000,000
TOTAL FIXED COST	3,270,000,000	3,300,000,000	3,340,000,000
Unit variable cost =	Selling price in MSRP- Dealer disciunt- cost material and labor
	Vehicle X	Vehicle Y	Vehicle Z
MSRP	15,999	20,999	25,999
Dealer Discount	1,600	2,520	3,900
variable costs	11,999	13,599	16,899
Net unit variable cost	2,400	4,880	5,200
New Contribution margin = MSRP-Net var.cost	13,599	16,119	20,799
Break Even in Units	240,461	204,729	160,586

Question 5.

Impact of introducing new vehicle on Fixed Cost and BEP

The fixed cost increases since in this case the amrketing costing of the new vehicle will increase to grt a markrt for the sale and reap revenue to cater for extra production costs

Then the Break even point will incrase directly as fixed costa increases.

New vehicle causes an additional depreciation cost, fixed overheads, and marketing andpromotion costs.

Hence the break even calculations will change and finally increases.