In Chapter Five on Slides Twelve and Thirteen, we're looking at a cost profit
volume or breakeven analysis.
With this,
we're gonna take a look at the information
that's given,
and then
we're going to go
and look at the problem. This is actually a cost profit volume.
Cost profit volume looks at profit.
When we take a look
at profit,
remember that profit is equal to
revenue minus total cost.
We need to figure out what's revenue
and what's total cost.
For a break-even
analysis,
we want our
profit to equal zero.
So, you can do that two ways. You can have your revenue equal your total cost, or you
can have your profit of zero equal your revenue minus your total cost.
Either way,
this problem
is actually
a profit problem. We're going to be taking a look at profit, which is revenue
minus
total costs.
So, let's go back to the slide and the problem.
Marie Hartwell is comparing two sites for her clothing boutique,
which she has decided to relocate from a tiny strip mall, that has had declining
business over the past two years. Marie's casual clothing generally appeals to younger
customers, and both sites will be more visible to these customers. One site is
located downtown near the campus of a prestigious prep school, the other is
in a popular indoor shopping mall.
Both sites have high traffic counts, which are listed on this next slide,
which we'll get to it in a minute,
which Marie
believes will be an important factor to her boutique's success. She estimates that
the average number of customers each day
will be about three...
excuse me, point three three percent of the daily traffic count (0.33 percent).
Let's stop here for a minute
and write this down. Information pertaining to this problem
is, we need to know
the average
daily
traffic
count,
and this is going to be point three three
percent (0.33%),
is what she's going to be using.
Now, when you do a problem and you see a percentage sign in there, you need to
transfer that to the decimal point,
point three three percent (0.33%) is the same as saying point zero zero three
three (0.0033).
Let's get some more information from here.
uh...
The value of the average sale per customer is about thirty dollars which is
the median price of her clothes.
So, we have an average
sale
which is thirty dollars,
her median price of clothes.
Go on to slide thirteen, the average cost of clothing she sells
is fifty percent of the retail
price.
More information, her average
is fifty percent
of the retail price.
Fifty percent of thirty dollars
is fifteen dollars.
She has some renovations she has to do which is listed on the chart of site
preparation,
and she'll be paying a monthly rent
uh... at each place. How many months in the year are there - twelve!
Her shop will be open three hundred and six days
per year.
We want to compare the annual before tax profit for the two sites.
Now, the reason we want to do before tax profit was
one is downtown, one's in a mall... not sure if they're both in the same uh...
tax areas if one city vs county, things like that...
you might need to take taxes into consideration, but right now we just want
to take a look at
before tax profit because we're gonna assume
that they're both in uh... the city or the county, whatever, so that
they're in the same tax bracket... same
amount of taxes will be held with each. So, here we have our average business
day traffic
for both downtown and the mall. The site preparation costs
and the monthly operating costs, your rent, your insurance, your staffing, etc.,
the light bill.
So, let's take a look
at how we can figure out her profit.
I have some information here that I wrote down that I pointed out, information on
the other...
on the actual slide, on your powerpoints... so what, again, we want to do
is we want to find
the profit,
which is equal to the revenue minus the total cost,
and I'm gonna start
with the profit
for downtown.
I need to figure out what the revenue is.
Well, I know
that my revenue is the sales that I'm making each day,
and we said that each sale was about thirty dollars, that was the median cost.
Well how many sales am I going to make,
because I want an annual number here.
Well, each day I'm gonna take
0.33 percent, which we said was point zero zero three three (0.0033)
of the traffic count. Point three three percent (0.33%) of people who come by the store,
walk by the store, actually come in and buy something,
and for downtown
that was sixteen thousand
five hundred (16,500).
Now we said annual. This is one day!
How many days a year
is she going to be open?
Three hundred and six (306) days a year.
That is my revenue.
Thirty (30) times point zero zero three three (0.0033)
time sixteen uh... thousand five hundred (16,500) times three hundred and six (306) days.
That's my annual revenue.
I wanna subtract
from that my total cost.
Well, what makes up total cost?
Total costs are equal to our variable cost
plus our fixed cost.
So,
let's see!
My variable cost.
Well, what does it cost me
to get the merchandise that I'm selling?
Fifty percent
of what
the median price was,
and we said that would be fifteen dollars.
Well, what's the cost of what I'm buying, well, what I'm selling.
So, I still have the same
numbers per the traffic count,
and the number of days that I'm open.
That's my variable cost here,
but I also have fixed costs.
I had renovation costs, for site preparation costs,
and I had my operating costs, the rent, etc.
So, my fixed cost, I'm going to add
to this number,
which site preparation for the downtown site
was
twenty two thousand dollars, ($22,000)
and
it was eleven thousand dollars a month, ($11,000)
and again we're doing this yearly, so I need twelve (12) months
for my operating costs,
and there I have my total cost.
So now I need to do the math,
and if we take a look at
our basic mathematical uh... operations and rules
is...
I'm going to stay within my brackets and my... stay within the parentheses within
the brackets first.
So, my revenue
is going to be
thirty (30)
times point zero zero three three (0.0033)
times sixteen thousand five hundred (16,500) times three hundred and six (306).
Four nine nine
eight five one (499,851) is what I got.
I am going to subtract
what's in the brackets,
fifteen (15) times point zero zero three three (0.0033) times sixteen five hundred (16,500) times
three hundred and six (306).
I got two hundred and forty nine
nine hundred and twenty five
fifty (249,925.50)
plus
twenty two thousand (22,000)
plus
eleven thousand (11,000) times twelve (12)
which I got
at a hundred and thirty-two
thousand (132,000).
So, I'm going to take this to the next page,
and
we have...
we're still looking for the profit for downtown.
Our revenue, four hundred and ninety nine thousand, eight hundred and fifty one (499,851)
minus
I had two hundred and forty nine thousand, nine hundred twenty five fifty (249925.50), twenty two
thousand (22,000), and a hundred and thirty two thousand (132,000)
all within that bracket
from
the last page, this right here.
If I add
all of that together
I get
four hundred and three thousand
nine hundred and twenty five
fifty (403,925.50),
subtract that from my revenue. So, this right here,
four hundred three thousand nine hundred twenty-five fifty (403,925.50)
is my total cost.
I get, and I subtract that from my revenue,
I get
ninety five thousand nine hundred and twenty five fifty (95,925.50)
as what my profit
from the downtown store would be if I decide
to move there,
and move my business there.
But I need to compare this to the mall,
so,
looking back just a minute,
a lot of these number stay the same.
I know that
my sale of the clothing
that I bring in stays the same,
the percentage of the traffic
stays the same, and it's going to be open the same number of days,
so, it's only
this number in the formula, the traffic count, that I need to change.
for my revenue.
On the
total cost side, my variable cost,
the price of the clothing, what it cost me stays the same,
again, the percentage of the traffic count and the number of days open all stay
the same,
and again
the traffic count
is what I have to change.
My site preparations,
that cost will change.
So, I need to take that and change that cost
along with
the cost
of operating
will change
although the number of months in a year, hopefully, we won't change that.
If you're changing it, let me know how you're doing it, I want to add an extra
month or two, especially if I get vacation for it!
Alright, I probably have to work but
I would like vacation for it!
So, let's take a look
at the profit
for the mall.
We have this formula. We figured this out already,
all we're doing is substituting
in the numbers that need to be substituted.
So, for the revenue,
it's still
thirty dollars,
times the point zero zero three three (0.003) or point three three percent (0.33%). The traffic
count though changes. The mall traffic count
is eighteen thousand
three hundred (18,300)
and it's still open
three hundred and six (306) days a year.
From that,
I want to subtract
my variable cost which
is going to be fifteen (15)
times point zero zero three three (0.0033)
times again the traffic count for
the mall,
which was eighteen thousand three hundred (18,300)
times the number of days, three hundred and six (306),
that it will be open.
I want ito add
to my variable cost,
the site preparation cost,
which is twenty five thousand dollars ($25,000)
for the mall,
plus
my operating costs, which again changes for the mall, and here it was
twelve thousand (12,000)
times the number
of months in a year - twelve (12),
so our formula now becomes
our revenue
minus our total cost,
putting in those numbers
that were specific to the mall versus downtown.
So, looking at this, I'm going to take it to the next page
uh... and do the math
so the profit for the mall, my revenue...
thirty times point zero
zero three three (0.0033) times eighteen thousand three hundred (18,300) times three hundred and
six (306) days,
I got
five hundred and fifty four thousand,
three hundred and eighty point two zero (554,380.20).
I want to subtract from that
my variable cost
was fifteen (15)
times point zero zero three three (0.0033) times eighteen thousand three hundred (18,300)
times three oh six (306),
which I've got as two hundred and seventy seven thousand one hundred and
ninety
point
one zero (277,190.10)
plus
my renovation cost, which we said
was twenty five thousand (25,000)
plus my operating cost for the year which we said was twelve thousand (12,000) times
twelve (12)
which is a hundred and...
excuse me, a hundred and forty four
thousand (144,000).
So, looking at this,
I still have
my revenue at five hundred fifty-four thousand
three hundred eighty point two zero (554,380.20)
minus
two seventy seven point one nine oh er....
two hundred seventy seven thousand one hundred ninety point point one zero (277,190.10) plus
twenty five thousand (25,000) plus a hundred forty four thousand (144,000),
I got four hundred forty-six thousdand, one hundred ninety point one oh (446,190.10),
and if I do the math correctly,
my revenue minus my total costs then will be one hundred and eight thousand,
one hundred and ninety, point one
zero ($108,190.10).
If my profit
is a hundred and eight thousand, one hundred and ninety
dollars and ten cents ($108,190.10)
at the mall
versus ninety five thousand
nine hundred and twenty five fifty ($95,925.50)
at the uh...
downtown
location, what would you do?
I
would pick the mall, I'm going to get a higher
profit.
That would be the better option.
This, right here, is how we take a look
at a cost profit volume
and looking at
pretty much a profit statement, revenue minus
total costs