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Profitability and Feasibility Analysis
Dr. Satyendra Singh
Professor, Marketing & International Business
University of Winnipeg, CANADA
sites.google.com/view/drsatsingh
Profitability Calculation
Total Revenue = The total money received from the sale of a product
Total Revenue = P (price) x Q (Quantity)
Total Profit = Total Revenue - Total Cost
Total cost—total expenses incurred by a firm in producing and marketing a product
Fixed cost (FC) —do not change with the quantity of product that is produced and cost
Variable cost (VC)—varies directly with the quantity of products produced and sold
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Cost, Volume, and Breakeven (BE) analysis
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Unit Contribution Margin (CM) = P - VC
Net Contribution = [(P-VC) x (Q)] - FC
Break-even volume (in units): FC / CM
Target Profitability Volume (in units): (FC + Target Profit) / CM
Calculate Contribution Margin and Breakeven Point
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Q | P | REVENUE TR = P x Q | VC | TVC = Q x VC | FC | TOTAL COST = FC + TVC | PROFIT = TR – TC |
0 | $100 | $0 | $30 | $0 | $28,000 | $28,000 | -$28,000 |
200 | 100 | 20,000 | 30 | 6,000 | 28,000 | 34,000 | -14,000 |
400 | 100 | 40,000 | 30 | 12,000 | 28,000 | 40,000 | 0 |
600 | 100 | 60,000 | 30 | 18,000 | 28,000 | 46,000 | 14,000 |
800 | 100 | 80,000 | 30 | 24,000 | 28,000 | 52,000 | 28,000 |
1,000 | 100 | 100,000 | 30 | 30,000 | 28,000 | 58,000 | 42,000 |
1,200 | 100 | 120,000 | 30 | 36,000 | 28,000 | 64,000 | 56,000 |
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i ii iii = $3 x ii iv = iii – i
Ad budget Attendance Sales Contribution
$10,000 50,000 $150,000 $140,000
$20,000 60,000 $180,000 $160,000
$30,000 66,000 $198,000 $168,000
$40,000 68,000 $204,000 $164,000
(Ticket price = $3)
Feasibility Test (What-if Analysis)
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Feasibility Test (What-if Analysis):
(Dealing with uncertainties)
Optimistic Most Likely Pessimistic
Sales (Units) 100,000 50,000 10,000
Contribution $200,000 $100,000 $20,000
Fixed Costs $75,000 $75,000 $75,000
Net Profit (Loss) $125,000 $25,000 -$55,000
(Assume contribution margin = $2 per ticket sold)
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Feasibility Test (What-if Analysis):
(Expected Value)
Suppose the company estimates that there was a 10% chance of the optimistic scenario, a 10% chance of pessimistic, and an 80% chance of the most likely outcome, then the expected profit can be calculated as follows:
.10($125,000) + .80($25,000) + .10(-$55,000) = $27,000
→ Positive expected value (EV)
Proceed!
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Questions?�s.singh@uwinnipeg.ca