Augustine Medical, Inc.

Breakeven Analysis for Product Tylenol Approach 1 - Same price as Tylenol Approach 2a - Cheaper than Tylenol Approach 2b - Cheaper w/lowered trade cost $ $ $ $ Unit Cost (Variable Cost) 0.60 0.60 0.60 0.60 Trade Cost (Selling Price to Retailers) $ 1.69 $ 1.69 $ 1.05 $ 0.70 Fixed Cost (Advertising) 2,000,000 6,000,000 6,000,000 6,000,000 Break-Even Quantity [Fixed Cost/(Trade Cost-Unit Cost)] 1,834,862 5,504,587 13,333,333 60,000,000 Contribution Margin (Unit) 64% 64% 43% 14%

The percentage Breakeven Sales Change can be calculated simply by dividing the unit sales change by the initial sales level, or may be calculated more directly with the following expression:

In order to calculate the breakeven point, we use the following equation and budget data:

Although the financial goal is to create profit, we need to calculate the breakeven point to get started.

5. Determine the necessary sales in unit and dollars to break-even or attain desired profit using the break-even formula.

Determine the unit break-even point, assuming fixed costs are $60,000 per period, variable costs are $16.00 per unit, and the sales price is $25.00 per unit.

Assume that next year management wants the company to earn a minimum profit of $162,000. How many units be sold to meet this target profit figure? [3 points]

Fixed costs in 2004 are lower that of 2003 and contribution margin ratio is higher in 2004 than that of 2003. Hence, the break even point is lower for 2004.

Break-even Dollar Volume = Total Fixed Costs / Contribution Margin = $525,000 / 0.7111 = $738,282.40

The Bair Hugger system, which consist of a heater/blower unit and a separate inflatable plastic/paper blanket, is an air-circulation product and provides hypothermia patients surface warming. The warming time per patient is about two hours. The plastic cover was patented in 1986; there is no patent protection for the heater/blower unit.

Break-even point analysis is a measurement system that calculates the margin of safety by comparing the amount of revenues or units that must be sold to cover fixed and variable costs associated with making the sales. In other words, it’s a way to calculate when a project will be profitable by equating its total revenues with its total expenses. There are several different uses for the equation, but all of them deal with managerial accounting and cost management (Break-Even Point, n.d.)

* The Bair Hugger Patient Warming System product is not a consumer device. The main users of this product consist of businesses and hospitals.

As an example, if fixed costs are $100, price per unit is $10, and variable costs per unit are $6, then the break-even quantity is 25 ($100 ÷ [$10 − $6] = $100 ÷$4). When 25 units are produced and sold, each of these units will not only have covered its own marginal (variable) costs, but will have also have contributed enough in total to have covered all associated fixed costs. Beyond these 25 units, all fixed costs have been paid, and each unit contributes to profits by the excess of price over variable costs, or the contribution margin. If demand is estimated to be at least 25 units, then the company will not experience a loss. Profits will grow with each unit demanded above this 25-unit break-even level.

Among 2 intermediate levels, one advanced, and one beginner and intermediate level, one should be chosen. I suggest the intermediate level to be opened since the night ski uses would mostly intermediate-high level users rather than beginners, and advanced level at night would be somehow dangerous. The operating cost would be $1000 per night, adding seasonal allocation of $20,000 fixed cost, $7.75 liability insurance per 1000 skiers, and $5000 for promotional cost. Therefore, the cost of operating night skiing is, $1000*120days+$20,000+$5000+$7.75*30= $145,232.50 per year. $135,000+$145,232.50=$280,232.50. The frequency of night skiing in cross tabulation of pass holder status was mostly 1-10 times per year. They will come for two or more days. The profit calculation will be approximately 2days* 5 times* $5.50=$55.0 per people for a year. 30,000 people*30%*$55= $495,000 per year. This profit exceeds the cost, so the company should invest in facilitating the night skiing.

Variable Cost per Unit = ( $59,000 − $38,000 ) ÷ ( 3,000 − 1,250 ) = $12 per unit