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Break-Even Analysis: Pharmasim

The document discusses break-even analysis for an existing and new pharmaceutical product. It provides information on fixed and variable costs, sales projections, and marketing budgets for each product. The assistant is asked to calculate break-even units for each product under the original and an increased fixed cost scenario. Other factors to consider besides break-even are also discussed.

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Majid Hashim
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154 views

Break-Even Analysis: Pharmasim

The document discusses break-even analysis for an existing and new pharmaceutical product. It provides information on fixed and variable costs, sales projections, and marketing budgets for each product. The assistant is asked to calculate break-even units for each product under the original and an increased fixed cost scenario. Other factors to consider besides break-even are also discussed.

Uploaded by

Majid Hashim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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PHARMASIM

Break-even Analysis

Break-even analysis attempts to determine the volume of sales necessary for a manufacturer to
cover costs, or to make revenue equal costs. It is helpful in setting prices, estimating profit or
loss potentials, and determining the discretionary costs that should be incurred. The general
formula for calculating break-even units is:
Total Fixed Cost
Break-even Units =
Unit Selling Price – Unit Variable Cost

In PharmaSim, total fixed costs can be broken into discretionary marketing expenditures (such as
sales force and advertising budget) and fixed costs for plant and overhead. The selling price is the
MSRP less the volume discount, and the unit cost of goods sold and allowance expense make up the
variable cost. In this assignment, you will use break-even analysis as a check against a plan to launch
a new product, and to assess the impact of higher fixed costs from an increase in capacity.

The firm has an existing product with an advertising and promotion budget of $ 25.0 million,
and projected sales of 115 million units. They are launching a new product with a budget of
$20.0 million and estimated sales of 10 million units in the first year. The sales force expense of
$10 million has been allocated equally between the products, with 90% of the plant overhead
to the existing product and 10% to the new product. Additional values for each product are
shown in the table below:

Existing Product New Product


MSRP $5.39 $4.99
Volume Discount 35% 35%
Unit Cost $1.49 $0.99
Promotion Allowance 15% 20%
Advertising & Promo. $25.0 mill. $20.0 mill.
Allocated Fixed Costs $68.0 mill. $12.0 mill.
Projected Unit Sales 115 million units 10 million units

1. In the table above, why do the fixed costs for sales force, plant, and administrative costs
need to be allocated to each product? Why are advertising and promotion expenses shown
separately from the allocated amount?
The fixed costs are allocated separately to each product because company wants to utilize its
resources effectively and have control on its resources. And also enhance its resources usage.
The advertising and promotion expenses are allocated separately to each product because
each product has different advertising messages and need different promotion activities. New
product has extra benefit than existing product so it is necessary to allocate separate budget.
PHARMASIM

2. Calculate the break-even units for each product, showing the intermediate calculations for
the total fixed costs, selling prices, and unit variable costs.
Existing Product New Product
T.F.C = (S.F+Ad: bud:) + F.C of Plant O.H
T.F.C = ($5+$25)+$68= $81million T.F.C = ($5+$20)+12 = $37 million
U.S.P =MSRP- Volume Discount
U.S.P= $5.39-$1.8865= 3.5035 U.S.P= $4.99-$1.226 = 3.764
U.V.C= Unit cost+all: expenses
U.V.C= $1.49+ $0.8085=$ 2.2985 U.V.C= $0.99+ $0.7485=$ 1.7385
B-E units= T.F.C/U.S.P-U.V.C
B-E units= 81/3.5035-2.2985= 81 million B-E units= 37/3.764-1.7385=18 M

3. How might the results of your break-even calculation affect the marketing of the new
product? What other factors besides break-even should you consider?

Other factors beside breakeven should consider is pricing strategies ,

4. Production anticipates it will need to increase capacity to 140 million units, adding $10.0
million to annual fixed costs. If the product allocation of the plant cost is also changed to
80%/20%, what is the impact on break-even units?

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