1. MGS3100_02.ppt/Jan 21, 2016/Page 1 Georgia State University - Confidential MGS 3100 Business Analysis Breakeven, Crossover & Profit Models Jan 21, 2016

2. MGS3100_02.ppt/Jan 21, 2016/Page 2 Georgia State University - Confidential Agenda CrossoverPricing ModelBreakeven

3. MGS3100_02.ppt/Jan 21, 2016/Page 3 Georgia State University - Confidential 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?

4. MGS3100_02.ppt/Jan 21, 2016/Page 4 Georgia State University - Confidential 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.

5. MGS3100_02.ppt/Jan 21, 2016/Page 5 Georgia State University - Confidential Agenda CrossoverPricing ModelBreakeven

6. MGS3100_02.ppt/Jan 21, 2016/Page 6 Georgia State University - Confidential 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

7. MGS3100_02.ppt/Jan 21, 2016/Page 7 Georgia State University - Confidential Agenda CrossoverPricing ModelBreakeven

8. MGS3100_02.ppt/Jan 21, 2016/Page 8 Georgia State University - Confidential 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?

9. MGS3100_02.ppt/Jan 21, 2016/Page 9 Georgia State University - Confidential Pricing Models Equation The profit equation would be: Demand = 200-3P Revenue = P(200-3P) = -3P 2 +200P Fixed cost = 1,000 Var Cost = 10(200-3P) Total Cost = 1,000+2000-30P Profit = -3P 2 +200P-1,000-2,000+30P = -3P 2 +230P-3,000

10. MGS3100_02.ppt/Jan 21, 2016/Page 10 Georgia State University - Confidential Pricing Models Slope Maximum profit is where the slope is zero. Slope can be calculated by taking the derivative of the profit equation. Slope = -6P+230 Set the slope equation equal to zero and solve Max profit is $38.33

11. MGS3100_02.ppt/Jan 21, 2016/Page 11 Georgia State University - Confidential Pricing Models Demand To determine demand, plug the max profit price into the demand function… Demand = 200 – 3P Demand = 200 -115 Demand = 85 rooms