Crossover for Biz Cafe - Welcome to Prospect Learning

```Biz-Café Breakeven and
Cross-Over Bakery Strategy
Ted Mitchell
Biz-Café Bakery
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Sell baked goods for \$2.00 each
with a volume at 30% of cups sold
You have three options
1) buy an oven \$4,000 and variable cost of 50¢
3) do nothing
Breakeven Quantity
• The cost of the oven is F=\$4,000. The average
selling price of the pastry is P=\$2 and the cost
of making a pastry is V=50¢. How many pastry
items must be sold to breakeven on the cost
of the oven?
• Z = PQ – VQ – F
• 0 = \$2Q – \$0.5Q – \$4,000
• 4,000 = 1.5Q
• Q = 4,000/1.5 = 2,667 items to breakeven
Memorized the BEQ equation?
• The cost of the oven is F=\$4,000. The average
selling price of the pastry is P=\$2 and the cost
of making a pastry is V=50¢. How many pastry
items must be sold to breakeven on the cost
of the oven?
• BEQ = F/(P-V)
• BEQ = 4,000/(2-0.50) = 4,000/1.5
• BEQ = 2,667 items
Forecasting sales
• Breakeven Quantity = 2,667 items
• Biz-Café is expecting 30% of its customers to
buy a pastry and the normal weekly sales of
coffee is 2,100 cups. How many weeks before
the oven is paid for?
• Forecasted sales 30% of 2,100 cups =
630 items a week
• Time required = 2,667/630 = 4.2 or 5 weeks
Forecasting the Time it takes
• using a Two-Factor Model
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Quantity sold = (quantity per week) x (# of weeks)
Q = (Q/W) x W
Need to know the number of weeks, W
We know the
anticipated quantity sold per week, (Q/W) = 630
quantity that needs to be sold to breakeven, Q = 2,667
2,667 = 630 x W
W = 2,667/630 = 4.2 or 5 weeks to breakeven
What if we had the option of
• Renting rather than Buying the Oven
• Renting the oven at F = \$15 per week? The
pastry sells for P = \$2.00 per item and the
variable cost per item is V = 50¢. What is the
breakeven quantity each week?
• BEQ = F/(P-V)
• BEQ = \$15/(2.00 – 0.50)
• BEQ = 10 items a week
Is it reasonable
to sell 10 items a week?
• Your normal weekly sales are 2,100 cups
• You anticipate 30% of the cup sales will be
pastry sales
• Anticipated pastry sales =2,100 x 30%
• Anticipated pastry sales = 630 items a week
• Only need 10 sales per week to breakeven on
the rental cost!
Is the Breakeven Quantity for the
Total Cost of the Oven Useful?
• There are two numbers that could be used
• 1) The Total Cost of the Oven, F = \$4,000
• 2) The allocated or depreciated cost of the
oven each week
• The oven is depreciated over 5 years or
over (52 x 5 =) 260 weeks
• The cost of the Oven each week is
• \$4,000/260 weeks = \$15.38 per week
Depreciation is NOT cash
• Use Depreciation when planning forward to
calculate breakeven with a meaningful
matching of costs and revenues each week
• Do NOT use Depreciation when calculating
the profit impact when dropping the bakery
• The Cost of the Oven is a Sunk Cost!
• What is the breakeven volume if the Biz-Café
and sells them for \$2.00 each?
• BEQ = 0 items
There are no fixed costs to cover!
What is the Better Deal?
• Option 1 Baking our own pastry each week
• Profit Contribution =
(Price – Variable Cost) Quantity – Fixed Cost
• Z1 = (\$2.00 – \$0.50)Q - \$15.38
• Z2 = (\$2.00 - \$1.00)Q
• Depends on the Volume Sold, Q
• What is the Cross-Over Quantity
Cross Over Point
Between two profit contributions from two strategies
Profit contributed by a strategy
Q*
Quantity Sold
Calculating the Cross-Over Quantity
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Z1 = (\$2.00 – 0.50)Q - \$15.38
Z2 = (\$2.00 - \$1.00)Q
Set Profit Contributions, Z, equal to each other
Z1 = Z2
(\$2.00 – 0.50)Q* - \$15.38 = (\$2.00 - \$1.00)Q*
\$1.5Q* - 15.38 = \$1.00Q*
(\$1.50-\$1.00)Q* = 15.38
\$0.50Q* = 15.38
Q* = 15.38/0.5
Q* = 30.76 cups per week is the cross-over point
Cross Over Point
Between two profit contributions from two strategies
Profit contributed by a strategy
Z1 = Own bakery
31 items
Quantity Sold
Weekly Cross Over Point
Between two profit contributions from two strategies
Profit contributed by a strategy
Z1 = Own bakery
31 items
Quantity Sold
630 items forecasted
• It would have been far more interesting if the
crossover point was 700 items sold and the
anticipated sales were 630 items
• Then you can have a qualitative discussion on
the value of ambiance!
Any Questions
• We have learned that cross-over analysis is
useful and its potential for application is not
obvious to most students
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