Table of Contents

Chapter 1 (Introduction)

Special Products Break-Even Analysis (Section 1.2) 1.2 – 1.6

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 Special Products Break-Even Analysis

• The Special Products Company produces expensive and unusual gifts.

• The latest new-product proposal is an iWatch with wireless internet.

• Data:
– If they go ahead with this product, a fixed cost of $10 million is incurred.
– The variable cost is $1000 per iWatch produced.
– Each iWatch sold would generate $2000 in revenue.
– A sales forecast will be obtained.

Question: Should they produce the iWatch, and if so, how many?

McGraw-Hill/Irwin 1.2 © The McGraw-Hill Companies, Inc., 2013

 Expressing the Problem Mathematically

• Decision variable:
– Q = Number of iWatches to produce

• Costs:
– Fixed Cost = $10 million (if Q > 0)
– Variable Cost = $1000 Q
– Total Cost =
• 0, if Q = 0
• $10 million + $1000 Q, if Q > 0

• Profit:
– Profit = Total revenue – Total cost
• Profit = 0, if Q = 0
• Profit = $2000Q – ($10 million + $1000Q) = –$10 million + $1000Q, if Q > 0

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 Special Products Co. Spreadsheet
A B C D E F
1 Special Products Co. Break-Even Analysis
2
3 Data Results
Range Name Cell
4 Unit Revenue $2,000 Total Revenue $40,000,000
FixedCost C5
5 Fixed Cost $10,000,000 Total Fixed Cost $10,000,000
MarginalCost C6
6 Marginal Cost $1,000 Total Variable Cost $20,000,000
ProductionQuantity C9
7 Sales Forecast 30,000 Profit (Loss) $10,000,000
8
Profit F7
9 Production Quantity 20,000 SalesForecast C7
TotalFixedCost F5
TotalRevenue F4
TotalVariableCost F6
UnitRevenue C4

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 Analysis of the Problem

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 Special Products Co. Spreadsheet
A B C D E F
1 Special Products Co. Break-Even Analysis
2
3 Data Results
4 Unit Revenue $2,000 Total Revenue $60,000,000 Range Name Cell
5 Fixed Cost $10,000,000 Total Fixed Cost $10,000,000 BreakEvenPoint F9
6 Marginal Cost $1,000 Total Variable Cost $30,000,000 FixedCost C5
7 Sales Forecast 30,000 Profit (Loss) $20,000,000 MarginalCost C6
8 ProductionQuantity C9
9 Production Quantity 30,000 Break-Even Point 10,000 Profit F7
SalesForecast C7
TotalFixedCost F5
TotalRevenue F4
TotalVariableCost F6
UnitRevenue C4

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