MGS 3100 Business Analysis Breakeven Crossover Profit Models

MGS 3100 Business Analysis Breakeven, Crossover & Profit Models Jan 21, 2016 Georgia State University - Confidential MGS 3100_02. ppt/Jan 21, 2016/Page 1

Agenda Breakeven Georgia State University - Confidential Crossover Pricing Model MGS 3100_02. ppt/Jan 21, 2016/Page 2

Breakeven • Sales – Costs = Profit • B/E is the point at which you are not making or losing $ • Must Account for Fixed and Variable costs • Example: Suppose we own a hotel, and our rooms rent for $50 per night. Our total fixed costs are $1, 000 and out Variable costs are $10 per room. What is the break-even? Georgia State University - Confidential MGS 3100_02. ppt/Jan 21, 2016/Page 3

Breakeven • Define the random variable X. • Express Total Revenue, Fixed cost, Variable cost, Total cost, and Profit in terms of X. • Calculate Breakeven point. • Draw two graphs - one of Revenue and Total Cost against the number of rooms, the other of profit against the number of rooms. Georgia State University - Confidential MGS 3100_02. ppt/Jan 21, 2016/Page 4

Agenda Breakeven Georgia State University - Confidential Crossover Pricing Model MGS 3100_02. ppt/Jan 21, 2016/Page 5

Crossover • Determining the point where two alternatives yield equal results • You have the option of subcontracting to improve room quality. Fixed Costs would increase to $1800, with no change to variable costs. You will, however, be able to charge $70 per room per day. At what point will you be indifferent between your current mode of operation and the new option? • Solution: Set the profit equations equal to each other Georgia State University - Confidential MGS 3100_02. ppt/Jan 21, 2016/Page 6

Agenda Breakeven Georgia State University - Confidential Crossover Pricing Model MGS 3100_02. ppt/Jan 21, 2016/Page 7

Pricing Models Example • Going back to our hotel room example, suppose the demand is: Demand=200 -3*Price • What price would you charge to maximize profits? Georgia State University - Confidential MGS 3100_02. ppt/Jan 21, 2016/Page 8

Pricing Models Equation The profit equation would be: Demand = 200 -3 P Revenue = P(200 -3 P) = -3 P 2+200 P Fixed cost = 1, 000 Var Cost = 10(200 -3 P) Total Cost = 1, 000+2000 -30 P Profit = -3 P 2+200 P-1, 000 -2, 000+30 P = -3 P 2+230 P-3, 000 Georgia State University - Confidential MGS 3100_02. ppt/Jan 21, 2016/Page 9

Pricing Models Slope • Maximum profit is where the slope is zero. • Slope can be calculated by taking the derivative of the profit equation. • Slope = -6 P+230 • Set the slope equation equal to zero and solve • Max profit is $38. 33 Georgia State University - Confidential MGS 3100_02. ppt/Jan 21, 2016/Page 10

Pricing Models Demand • To determine demand, plug the max profit price into the demand function… • Demand = 200 – 3 P • Demand = 200 -115 • Demand = 85 rooms Georgia State University - Confidential MGS 3100_02. ppt/Jan 21, 2016/Page 11