Subject: General Questions    / General General Questions
Question
STRATSIM 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:
Break-even Units = ? In StratSim, total fixed costs can be broken into discretionary marketing expenditures, and fixed costs
for plant and overhead. The selling price is the MSRP less the dealer discount, and the cost of materials
and labor make up the variable cost. In this assignment, you will allocate fixed costs across a portfolio of
products and calculate the break-even units for each product.
A firm’s production capacity is 1.5 million units, with annual fixed costs of $3.2 billion for depreciation,
plant maintenance, corporate marketing, and general overhead. Additional values for the three vehicles
produced and sold by the firm are shown in the table below: MSRP
Dealer Discount
Variable Cost
Adv. & Promo.
Prev. Unit Sales VEHICLE X
$15,999
10%
$11,799
$35 million
400 thousand VEHICLE Y
$20,999
12%
$13,599
$50 million
600 thousand VEHICLE Z
$25,999
15%
$16,899
$70 million
300 thousand 1. How will you allocate the fixed costs across the products? 2. Calculate the break-even units for each product, showing the intermediate calculations for the
allocated fixed costs and selling price (dealer invoice). Continued on Next Page . . . STRATSIM
(Cont’d.)
3. What impact does a 10% drop in MSRP have on the break-even point for each vehicle? 4. Using the original MSRP, recalculate break-even if advertising and promotion expense for each
product is doubled. 5. What impact might the introduction of a new product in your vehicle line have on fixed costs and
the break-even calculation?

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