Problem: Imagine that you are an entrepreneur at a location in the United States. You are planning to enter the gourmet vegetarian burger market.
[1] Using break-even analysis, you want to determine at what volume of burger sales will you start to make money.
One of your partners developed an expected unit sales forecast. You want to compare this 18-month forecast of 150,000 units to the volume of burgers you will have to sell in order to break even.
You are forecasting 18-month sales because that is your banker's deadline for showing a profit. If you are not making money in 18-months, your banker may call your loan, and you would be facing bankruptcy.
The variable unit cost for making one burger is $.97.
The fixed cost of making burgers for 18 months will be a total of: $140,000. Fixed costs cover things like your rent, your phone bill, and insurance coverage - these items tend not to vary in amount per month over the term of one year.
Your partner has forecast expected unit sales of 150,000 burgers in 18 months.
The unit price you are projecting for the gourmet vegetarian burger is $1.99.
If you charge $1.99 for your burger, how many burgers will you have to sell before you make back your total cost?
[2] What happens to the break even point when the unit price is raised to $2.79?
The variable unit cost for making one burger remains at $.97
The unit price you think you might sell the burger for is: $2.79.
If you charge $2.79 for your burger, how many burgers will you have to sell before you make back your total cost?
[3] What are the implications of this analysis?
What factors are considered by this analysis? What factors are missing? How comfortable are you about the possibility of success in this venture? Why?