Reference no: EM132981113

Break Even Analysis:

Here is the information your team gathered from company executives and from consumer and trade research. Your company president is primarily concerned about breaking even on the fixed program costs for advertising and promotion in Year 1. She added "if we do break even, I want to know how much we will be able to contribute to ongoing fixed costs."

This would be the first refrigerated pizza in the market. It would taste better than existing frozen pizza and be less expensive than fresh delivery or takeout pizza.

The product manager for refrigerated pasta estimates that 24% of the 95.5 million US households in the target market will have tried the pasta by the time pizza launches.

Management has allocated $12 million for advertising. Your ad agency believes this will produce 37% awareness overall. However, since your pasta users are more likely to attend to the ads, awareness of the new pizza among your pasta users is expected to be twice as high as for non-users: roughly 60% for users and 30% for non-users.

Management has allocated $9 million for trade promotions. A survey of supermarket buyers suggests that this amount should lead to an ACV of 58%. Your company spent significantly more on the pasta product and, after 4 years, now has an ACV of 89%.

Your research department conducted a survey of 600 households in the target market. Respondents were shown the product with a retail price of $6.50 and asked to indicate their likelihood to purchase (Exhibit A). The research department knows that many people inflate their purchase intent in surveys. In their experience, 80% of the respondents who indicate that they definitely would buy and 30% of those who indicate that they probably would buy actually end up buying.

Exhibit A Users of your Pasta (n=112) Non-Users of your Pasta (N=488)

Definitely would buy 30% 15%

Probably would buy 57% 59%

The survey also showed that, of the households who would actually buy the product, each would purchase 1.2 pizzas on average at the first purchase occasion.

Based on prior experience with new product launches, company management expects that 22% of consumers who buy the new pizza would become repeat purchasers. Repeat purchasers are expected to purchase 2 additional pizzas on average during the first year.
Retailer margins are 30% and total variable costs per unit are expected to be $2.55.

Formula's:

Breakeven (Units) = Fixed Costs / (Selling Price - Variable Cost) Or = Fixed Costs / Unit Margin or Unit Contribution

Breakeven (Rev$) = Fixed Costs / (Selling Price - Variable Cost) / Selling Price Or = Fixed Costs / Margin %

With either measure, it is simple to calculate the other, using price to convert.

Breakeven in Units = Breakeven ($) / Price
Breakeven (Rev$) = Breakeven (Units) * Price