How much money to make in volume
CompetitionPricing StrategyProcess ImprovementProfit Taylor Swift and some other performers appear to have decided the old concert ticket-pricing model was not profitable enough and they have changed pricing strategies. Historically the most common strategy has been to price tickets low enough to ensure a rapid sellout of each venue. Now Miss Swift and others have decided profit is more important than volume, and initial ticket prices are much higher. The question being revisited by these musicians is the same question faced by thousands of companies — Is your strategic objective to maximize volume or maximize profit? All companies must answer that question.
However, there is not a specific price level that you can charge that will assure you that you will cover your costs. Because fixed costs need to be covered regardless of the number how much money to make in volume units produced and sold, the number of units you produce and sell determines the price needed to break even.
To do this you need to classify the costs into the managerial cost categories of variable and fixed costs. One approach is to pick a sale price or a series of sale prices and compute how much of the product you will need to sell at each price to break even.
Breakeven sales volume is the amount of your product that you will need to produce and sell to cover total costs of production. This can be computed under a range of sale prices with the formula below. A key concept of this formula is the Contributions Margin.
A profit-volume PV chart is a graphic that shows the earnings or losses of a company in relation to its volume of sales. Companies can use profit-volume PV charts to establish sales goals, analyze whether new products are likely to be profitable, or estimate breakeven points. Key Takeaways A profit-volume PV chart is a graphic that shows the earnings or losses of a company in relation to its volume of sales. The profit-volume chart gives a company a visual of how much product must be sold to achieve profitability. Companies can use profit-volume charts to establish sales goals, analyze whether new products will be profitable, or estimate breakeven points.
It is the amount of money that the sale of each unit will contribute to covering total fixed costs. The breakeven level is the number of units required to be produced and sold to generate enough contributions margin to cover fixed costs.
The example below helps explain the concept. Select a range of sale prices and compute the contribution margin for each price.
US & World
Next, divide total fixed cost by each contribution margin to compute the breakeven sales quantity. Notice that the higher the price, the smaller the quantity you will need to sell to break even.
However, at higher prices, the product will be more difficult to sell. To prove that the procedure is correct, go through the steps below.
Losing Money, but Making it up on Volume
First determine gross income. Then determine total variable costs. Next compute the return over variable costs. Finally compute the return over all costs. As shown below, because we were computing breakeven price, the return over all costs is zero.
A graphic representation is shown in Figure 1.
The level of sales is on the horizontal axis. Revenue and costs are on the vertical axis. The revenue line shows the total revenue at each level of sales.
The total cost line shows the total cost at each level of sales. The cost at zero sales represents the fixed cost.
The level of cost over this amount is the variable cost at various levels of sales. The level of sales where the two lines cross S1 is the breakeven level of sales. At sales levels above this level S2the amount by which the revenue line is above the cost line is quick options binary options. At sales levels below this level S3the amount by which the cost line is above the revenue line is loss.
Don Hofstrand, retired extension value added agriculture specialist, agdm iastate.
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- He has provided education to individual traders and investors for over 20 years.