Breakeven analysis provides insight into how various cost structures influence the viability of a product in the marketplace. That is, if the breakeven point in unit sales is higher than marketing's forecast sales level, the product will not be profitable and should not be launched. Top management therefore uses breakeven analysis as a strategic planning tool to estimate expected profit or loss over a range of sales or for alternative processes. Purchasing and supply chain specialists use breakeven analysis for the following: - Identify if a target purchase price gives supplier a reasonable profit. - Analyze supplier's cost structure. - Make comparisons across different process options. - Perform "what-if' analysis. - Prepare for Negotiation Breakeven Analysis: Sourcing Decision Consider the following: Breakeven Point: X=FC / (P-VC) Net income or loss =PXVCXFC Where: - P=Average Purchase Price, - X= Units produced - VC=Variablecostsperunitofproduction - FC= Fixed costs of production for an item. You are about to enter into a negotiation. You expect that you can negotiate a purchase price of $20 if you agree to buy 3,000 units. You have estimated that your potential supplier's cost structure consists of the following: $5 per unit variable costs and $30,000 fixed costs. 1) What is the supplier's breakeven point? 2) What is the supplier's expected profit if you have run the numbers correctly? If your cost analysis is wrong (i.e., the supplier's variable costs are really $10 per unit), but your target price is still $20 per unit, what is the supplier's 1) breakeven point and 2) expected profit (your target price is still \$20 per unit)? Breakeven analysis provides insight into how various cost structures influence the viability of a product in the marketplace. That is, if the breakeven point in unit sales is higher than marketing's forecast sales level, the product will not be profitable and should not be launched. Top management therefore uses breakeven analysis as a strategic planning tool to estimate expected profit or loss over a range of sales or for alternative processes. Purchasing and supply chain specialists use breakeven analysis for the following: - Identify if a target purchase price gives supplier a reasonable profit. - Analyze supplier's cost structure. - Make comparisons across different process options. - Perform "what-if' analysis. - Prepare for Negotiation Breakeven Analysis: Sourcing Decision Consider the following: Breakeven Point: X=FC / (P-VC) Net income or loss =PXVCXFC Where: - P=Average Purchase Price, - X= Units produced - VC=Variablecostsperunitofproduction - FC= Fixed costs of production for an item. You are about to enter into a negotiation. You expect that you can negotiate a purchase price of $20 if you agree to buy 3,000 units. You have estimated that your potential supplier's cost structure consists of the following: $5 per unit variable costs and $30,000 fixed costs. 1) What is the supplier's breakeven point? 2) What is the supplier's expected profit if you have run the numbers correctly? If your cost analysis is wrong (i.e., the supplier's variable costs are really $10 per unit), but your target price is still $20 per unit, what is the supplier's 1) breakeven point and 2) expected profit (your target price is still \$20 per unit)