Break$-$Even Analysis: Majestic Pool

Builders

Break$-$even analysis is a useful technique that enables managers to examine the relationships among cost, price, revenue, and profit

over different production and sales levels. Central to this analysis is the determination of the break$-$even point or the point at which the

number of units sold generates just enough revenue to equal the total costs. At this point, profits are zero. To determine the break$-$

even point in units mathematically, you must examine the price, fixed costs, variable costs and calculate the contribution per unit,

which is the price per unit less the variable cost per unit. When a company has crossed the break$-$even point, it will start earning profit

at the same rate of the contribution per unit. The formula for determining the break$-$even point is:

Fixed cost

Break$-$even point $($units$)=\frac{\text{F}\text{i}\text{x}\text{e}\text{d}cost}{\text{C}\text{o}\text{n}\text{t}\text{r}\text{i}\text{b}\text{u}\text{t}\text{i}\text{o}\text{n}\text{s}\text{p}\text{e}\text{r}\text{u}\text{n}\text{i}\text{t}}$

Contributions per unit $=$ price per unit $-$ variable cost per unit

Although a break$-$even analysis cannot help managers set prices, it does help them assess their pricing strategies because it clarifies

the conditions in which different prices may make a product or service profitable. At any quantity of units sold, the formula for Profits $=$

$($Contribution per unit $$ Quantity$)-$ Fixed costs.

Read the fictional scenario below and perform a break$-$even analysis.

Case:

Majestic Pool Builders promises more than the customer has ever imagined for their backyard resort. It designs and constructs custom

swimming pools & spas with superb beauty and value. Jessica Sumners, the operations manager, is convinced that the company offers

a premium service and that the current price does not capture the value that it should. After numerous meetings with the owners,

Majestic Pool Builders want to analyze the effects of a price change. While different pools are priced differently, the company performs

its break$-$even analysis using the "typical" pool that currently sells for $$35,000$ for design and construction.

The variable costs for a Majestic's swimming pool include excavation, landscaping, pool equipment, labor, building permits, and various

add$-$ons. In total, these construction components amount to $$14,000$ in variable costs. The company has annual fixed costs of

$$325,000$ to cover labor, rent, insurance, advertising, utilities, and other expenses. In the average year, Majestic Pool Builders designs

and constructs around $45$ pools.

What is the contribution per unit $($pool$)$ for Majestic Pool Builders?

What is the break$-$even point in number of pools for Majestic Pool Builders?

What are the expected monthly profits for Majestic Pool Builders?

What will the profits be if Majestic Pool Builders sells $54$ units $($pools$)?$

If a close competitor sets their price to $$21,000$ per pool, should Majestic Pool Builders match the price?

What is the approximate break$-$even point in pools for Majestic Pool Builders if its fixed costs rise to $$487,500?$