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Cost Total Cost

k = variable cost per unit

Fixed Cost

V Volume (Quantity)
Total Cost for output level V units = fixed cost + k*V

As you produce more units, the average cost per unit goes down (fixed
costs are spread out over more units).
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%

Fixed cost = $40,000,000
(player/manager/staff salaries, overhead, etc.)
Variable cost per seat sold (k) = 400
(shipping of tickets, custodial staff, maintenance, etc.)
Total # of seats = 46,000

If all seats are sold, variable costs are $18,400,000.

Total cost 58,400,000.
Total cost per seat if all seats are sold 1,270

If only half of the seats are sold, the total cost per unit is ___, because
the fixed costs of $40,000,000 are only covered by sale of 23,000 seats.

(These are made up figures!)

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|nit Contribution = P ± k (P = price charged)

Total Contribution = (P ± k) * V = PV± kV

= Price charged minus variable costs.

This is what you have left over to cover your fixed

costs and profit.

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Assume season tickets are sold for $2500 on average.

|nit contribution = $2500 - $400 = $2,100

Total contribution, assuming all 46,000 seats are sold

= $2100 * 46,000 = $96,600,000

This tells us that after fixed costs of $40,000,000, we will

have a profit of $56,600,000.

If only half of the seats are sold, our total contribution

= $2100*23,000 = $48,300,000, leaving us with
a profit of $8,300,000
 
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Assume season tickets are sold for $2000 on average.

|nit contribution = $2000 - $400 = $1600

Total contribution, assuming all 46,000 seats are sold

= $1600 * 46,000 = $73,600,000

This tells us that after fixed costs of $40,000,000, we will

have a profit of $33,600,000.

If only half of the seats are sold, our total contribution

= _________________ leaving us with
a ______________.


 
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$ Margin = Selling price ± variable cost

(In this case, Margin is the same as unit contribution)

Beware, margin can often mean different things. Make sure

you have clarification of the specific elements included.

% Margin = (Selling price ± variable cost) / Selling price *

100% (this shows the % as a whole number instead of a
decimal)
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$ Total Revenue (Price * V)

Total Cost (Fixed Cost + k*V)

BEV Volume (|nits)

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BEV is the point at which
Total Revenue = Total Cost

 r said differently, you are at break even

when Price * V = Fixed cost + (k*V)

BEV = Fixed cost / (Price ± k)

r more simply

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Example.

An advertising campaign costing $500,000 has been proposed

for Safeco tickets with a unit contribution of $1,600. How many
additional seats will need to be sold as a result of the campaign
in order to justify its costs?? How many at $2,100?

$500,000 / $1600 per seat = 313 seats

$500,000 / $2100 per seat = 238 seats

What if the proposed campaign cost $2,000,000? How many seats

would we have to sell to break even at $1,600/seat and $2,100/seat?
 ¢

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—umbers have more meaning when there is a benchmark against
which to compare them.
Market size

rowth rate
Competitive activity

For example, if we determine that we need to sell 78,125 units of a

product to break even«
What does this mean for a product that is part of a
highly competitive, stable market with 150,000 units sold
annually
vs.
an emerging, fast-growing market with 1,000,000 units sold
annually.
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 Market potential (Demand) = potential #

of buyers * average quantity purchased by
a buyer * price

Potential buyers are the people for whom

your product is a solution to their need. It
is not a function of your manufacturing
capacity.
 ! " # %v 
 Company Demand Forecast (Potential): the
amount of sales of the market potential you
believe you can capture, relative to that of
competitors.
± E.g. if you have a superior product, you will have a
higher demand forecast than if your competitors¶
products were superior.

 Company Sales Forecast: expected level of

company sales based on a chosen marketing
plan± this reflects your efforts to take advantage
of the company demand forecast.
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 3-stage procedure: prepare a macroeconomic forecast
(based on expected inflation, unemployment, interest rates,
consumer spending, etc.), followed by an industry forecast,
followed by a company sales forecast
 Based on what people say:
± Survey of buyers¶ intentions/needs
± Composite of sales force opinions
± Expert opinion
 Put the product into a test market and measure buyer
response
 Analyze records of past buying behavior and use a
statistical method of projecting this behavior into the future
 
2(3

 Profit (Revenue ± Total Cost)
 Market Share
± Specify share of what market (global, national,
regional, etc.)
± Dollars vs. %
 Revenues

rowth
 Return on Investment (R I)
= net income / total investment * 100%
 Return on Equity (R E)
= net income / owners¶ equity * 100%
 Return on Assets (R A)
= net income / total assets * 100%