PRICING Break Even Analysis

In order to cover expenses, businesses add a MARK-UP –Amount of money added to the original cost of the product to cover expenses –Usually expressed as a percentage of the cost Example: if the base cost of an item is $5, we can’t sell it for $5 – we need to cover our expenses and make a profit. If we add $3 and make the selling price $8, we have added a 60% mark-up (3/5 = 0.6)

What do you think are the top 5 retail mark ups? Hint: think about specific products or whole industries! Top 5 retail mark ups.doc

Article: Top 5 Retail Mark Ups Beverages Weddings Grocery Store Produce Clothing & Accessories Concessions

Break-Even Analysis Analysis allows us to figure out the Break Even Point –BEP: the number of units a business must sell at a given price to cover its costs –The Break Even Point (BEP) is when Revenue = Expenses, and therefore Profit/Loss = 0 Need to calculate three things: –Variable Costs –Fixed Costs –Gross Profit (a.k.a. Contribution Margin)

Break-Even Analysis Variable Costs: –Most often dependent on the quantity of goods sold or services performed E.g. a hair salon, gas for a taxi driver, a restaurant –Variable costs vary (change) with time, situation, season, etc. Fixed Costs: –Constant (fixed), independent of sales –E.g. rent, salaries/wages, insurance, utilities *They remain the same unless the business grows*

Break-Even Analysis Gross Profit = selling price – variable costs This money left over is used to pay for the fixed costs (e.g. coffee) Break-Even Point = fixed costs gross profit ** Businesses need to decide if they can wait until they sell X amount before they become profitable**

B/E Analysis Example A teddy bear manufacturer sells its bears to a retailers for $18 each The Variable Costs are $3 per bear The Fixed costs are $

Gross Profit = selling price – variable costs Gross Profit = $18 - $3 = $15 Break Even Point (BEP) = Fixed Costs Gross Profit BEP = $ = bears $15

Case Study SweetJeans