Survey of Accounting: Pricing Strategy and Break-Even Analysis

School: Oklahoma State University - Course: ACCT 2003 - Subject: Accounting

Survey of Accountingp. 1 Packet 3 Semester Case - My Assistant As you know from your pre-class work, W.T. needs to determine how much he'll charge the customers of My Assistant. Keep in mind that he'll need to (1) cover costs and (2) earn a profit so he can be paid. Part 1 We've already done quite a bit of work on projected costs for My Assistant, so pull out your notes from Packet #2. To recap, W.T.'s planning on the following: Newspaper ad$120 per month Social media manager$100 per month; $1 per job scheduled Payment collection$0.75 per job Gas$4.00 per job Considering his analysis of similar services and to keep things simple, W.T. plans to price all jobs the same and charge $15 per job. Because of this flat rate, he anticipates he'll likely need to create different types of "jobs". For example, purchasing a list of items at the grocery store would be one job, while a bundle of 2-3 small errands such as picking up dry cleaning and prescriptions, might be considered one job. We'll deal with those details later. For now, assume that all jobs are priced at $15 each and all have the associated variable expenses listed above. Because this will be a new business, W.T. knows business will likely be slow at the beginning. Complete the following table assuming W.T. completes 10 jobs in a single month. ItemPer JobTotal(10 jobs) Computations Sales$ 15.00$ 150.00 15.00 x10 = 150 Less: Variable Cost$ 5.75$ 57.50 5.75 x10 = 57.50 Contribution Margin$ 9.25$ 92.50 9.25 x10 = 92.50 Less: Fixed Cost$ 22.00$ 220.00 22.00 x10 = 220.00 Gross Margin$ 12.75$ 127.5012.75 x10 = 127.50

Survey of Accountingp. 2 Packet 3 Part 2 Yikes! He'll clearly have to complete more than 10 jobs. W.T. needs to be able to at least cover his costs. Still using the preliminary estimates provided, how many jobs would W.T. have to complete to break even? What would that be in dollars? (1) Contribution margin: Sales price per job$ 15.00 Less: Variable costs per job$ 5.75 =Contribution margin per job$ 9.25 (2) Break-even point in units: TOTALFixed costs=$ 220.00 = 23.78378378 jobs Contribution marginper job $ 9.25 Note: W.T. won't be paid if he only completes part of a job. 24 Jobs (3) Break-even point in sales: Break-even point in jobsxSales price perjob=Break-even point in dollars 24x$ 15.00=$360.00 Check your work: Total sales$ 360.00 Less: Total variable costs$ 138.00 = Total contribution margin$ 222.00 Less: Total fixed costs$ 220.00 = Total profit$ 2.00 Question: Why is breakeven profit not exactly $0? We rounded up to 24 Jobs, meaning an extra 20%/Job.