The Possibility of Making a Profit for My Product

The Possibility of Making a Profit for My Product

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The Possibility of Making a Profit for My Product

Aim: To word process a report, investigating the possibility of making
a profit for my product. In order to do this I will be required to use
break-even analysis. This will involve working out costs, setting
prices, and producing spreadsheets and charts. All the information
gathered would be used to word process a report, which will explore
the possibility of making a profit.



Task 1 Introduction
====================================================

My last piece of coursework will be based on finance. I will be
investigating the cost of launching a product and the possibilities of
making a profit. During my coursework I will have to buy a product and
then sell it higher than the original price thus making a profit, I
will have to choose a product which will be popular and high
profitable. The product that I decided to choose will be a Subaru
Impreza remote control car; Subaru will manufacture the cars. Each car
will cost me £20.

To help me work out if my product will be a success I will be using a
break-even chart this will show whether my product will be a success
or a failure. A break-even chart is a graph, which shows total costs
and total revenues and the break-even point where total revenue equals
total cost. During the research I will be writing about the pricing
strategies I am going to use to sell my product.


The cars will be sold in packages in the package some additional items
are included these are:
----------------------------------------------------------------------

· Subaru Impreza remote control model (15cm height x 30cm length).

· Remote control

· Battery

· Battery charger

· Instruction booklet

· Subaru Impreza collectable poster

My forecast is that there will be 1000 paying customers per year. Each
will pay at least £100 for the most unique remote control car ever to

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be made. On top of that I will be advertising in large stores such as
Argos, this will not be cheap, it will cost me a further £1000.

Interest on a £10 000 bank loan comes to £5 000. Other expenses such
as heating, lighting and insurance comes to at least £10 000. I will
have to pay £10 000 in staff wages. All this information can be
summarised in the table below.

(The table below is just an example of how my business may look).

12 month budget for my remote control car business

Revenue (£)

Costs (£)

Sales from cars - £100 000

Advertising - £1000

Buying the cars - £20 000

Bank Loan - £15 000

Labour - £10 000

Other Expenses - £10 000

Revenue - £100 000

Costs - £56 000

Profit – £44 000



Task 2 Fixed And Variable Costs
===============================

Fixed Costs are costs, which remain the same whatever the level of
output of the businesses. For example a fixed cost could include
mortgage, you have to pay a certain amount no matter what state your
business is in.

Variable Costs are costs, which vary directly with the output of the
businesses. For example your gas bills you have to pay depending on
how much gas you use if you use a lot of gas you will pay a certain
amount if you use a little bit you will end up paying a little amount.

Fixed Costs

Per month

Per Year

Mortgage / Rent

£1 000

£12 000

Salaries

£1 000

£12 000

Contents insurance

£1 000

£12 000

Businesses Rates

£1 000

£12 000

Advertising

£83

£1000

Labour

£166

£1000

Total Cost

£4 249

£50 000

Variable Costs

Per month

Per Year

Company Car

£100

£1 200

Telephone Bill

£50

£600

Stock

£20 000

Total Cost

£150

£21 800

Per month

Per Year

Fixed Costs

£4 249

£50 000

Variable Costs

£150

£21 800

Total Cost

£4 399

£71 800



Task 3a Pricing Strategies
==========================================================

There are many different pricing strategies that can be used by a
business a few of them are.

· Creaming/Skimming: Selling a product at a high price, sacrificing
high sales in order to earn high profits.

· Market orientated pricing: Setting a price based on an analysis of
the market.

· Mark-up or profit margin: The percentage added to the cost of the
production, which equals to the profit on the product.

· Penetration pricing: Setting an initial low price for a new product
so that it is attractive to customers. The price is likely to be
raised later as the product gains market share.

· Price discrimination: Setting a different price for the same product
in different segments of the market.

· Profit margin: The extra, which is added to the cost of the product
to cover the profit to be made.

· Competition based pricing: Setting a price based on prices charged
by competitors for similar products.

· Cost plus pricing: Fixing a price by adding a percentage profit
margin to the cost of production of the good or service.



Task 3b
=======

The first pricing strategy I have decided to use is called Penetration
pricing; I priced my car at £50 each. I done this because setting an
initial low price for a remote control car will attract customers.

I will then slowly raise my price once it has gained market share.

The second pricing strategy I have decided to use is called Market
orientated pricing; I priced my car at £100 each. I calculated by
researching all the top models in the market and calculating an
average price.

Businesses may change their pricing methods overtime for a number of
reasons. This could be because they want to promote their product so
they lower their price to attract their customers. They might want to
lower their prices in order to compete against other organisations.
They might simply want to raise their prices because the prices of the
materials have risen so in order to gain the same amount of profit as
before they have to raise the price of the product.



Task 4 + Task 5 Break-Even Equations + Graphs
===================================================


Break Even Analysis For My Business (First Pricing Method)
----------------------------------------------------------

Number Of Cars Sold

Total Revenue

Total Fixed Costs

Total Variable Cost

Total Costs

Profit/ loss

1000

50000

50000

20000

70000

-20000

1100

55000

50000

22000

72000

-17000

1200

60000

50000

24000

74000

-14000

1300

65000

50000

26000

76000

-11000

1400

70000

50000

28000

78000

-8000

1500

75000

50000

30000

80000

-5000

1600

80000

50000

32000

82000

-2000

1650

82500

50000

33000

83000

-500

1670

83500

50000

33500

83500

0

1700

85000

50000

34000

84000

1000

By using the break-even equation I calculated that I have to sell 1670
remote control cars priced at £50 each.

(Total Costs = Total Revenue)


Break Even Analysis For My Business (Second Pricing Method)
-----------------------------------------------------------

Number Of Cars Sold

Total Revenue

Total Fixed Costs

Total Variable Cost

Total Costs

Profit/ loss

500

50000

50000

10000

60000

-10000

600

60000

50000

12000

62000

-2000

610

61000

50000

12200

62200

-1200

620

62000

50000

12400

62400

-400

622

62200

50000

12440

62440

-220

625

62300

50000

12460

62460

-160

624

62400

50000

12480

62480

-80

625

62500

50000

12500

62500

0

700

70000

50000

14000

64000

6000

800

80000

50000

16000

66000

14000

900

90000

50000

18000

68000

22000

1000

100000

50000

20000

70000

30000

By using the break-even equation I calculated that I have to sell 625
remote control cars priced at £100 each.

(Total Costs = Total Revenue)

[IMAGE]



Task 5 spreadsheet
=========================================

0

200

400

600

800

10000

1200

1400

1600

1800

20000

Total Revenue

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

Total Fixed Costs

50000

50000

50000

50000

50000

50000

50000

50000

50000

50000

50000

Total Costs

50000

54000

58000

62000

66000

70000

74000

78000

82000

86000

90000

0

100

200

300

400

500

600

700

800

900

10000

Total Revenue

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

Total Fixed Costs

50000

50000

50000

50000

50000

50000

50000

50000

50000

50000

50000

Total Costs

50000

52000

54000

56000

58000

60000

62000

64000

66000

68000

70000

* This spreadsheet differs from Task 4 because the results
in Task 4 did not start from zero, because of this the line were in
three different positions and weren’t crossing each other so it didn’t
look like a break-even chart. So what I did was I divided a few
numbers so that the results start from zero onwards.



Task 6a Findings
================

By observing the first break-even chart where it shows the remote
control cars priced at £50 each, I could see that the fixed costs are
always £50000. I could see that the total revenue starts at zero and
that the Total costs start at £50000. I could also see that the
break-even point is at 1670, 835500. Below this point my business will
be at loss. And above the point the business will be making a profit.

The break-even chart tells me that I would have to sell 1671 remote
control cars to make the minimum amount profit. It also shows me that
my business will be a failure because I only ordered 1000 cars. So by
the end of the first year I would of not made a profit. So I would
have to order a further 1000 car in order to make a profit.

By observing the second break-even chart where it shows the remote
control cars priced at £100 each, I could see that the fixed costs are
always £50000. I could see that the total revenue starts at zero and
that the Total costs start at £50000. I could also see that the
break-even point is at 625, 62500. Below this point my business will
be at loss. And above the point the business will be making a profit.

The break-even tells me that I would have to sell 625 remote control
cars to make the minimum amount of profit. It also shows that my
business will be a success if I could sell all the cars, because
unlike the first chart I do not need to order a further 1000 cars.

Task 6b

If my cars was priced at £50 each I will be making £16500 profit by
the end of the two years. If I priced my car at £100 each I will be
making £37500 profit by the end of the year.

If I reduced my price due to competition, I would only decrease it by
£10 or £20. This is because when I priced the car at £50 I was in
actual terms making a loss. And it would take me a long time to make
my profit. Even though lowering my price means that it would take
longer to make my profit and that I would have to sell more cars, I
would still be able to make a profit by the end of the first year.

If costs were to increase I would higher the price of my remote
control cars. This would look very bad on my business but I have no
choice. An alternative solution would be to take the money out of the
profit out of my own pocket and pay; this would mean less profit for
me.

If my costs were to increase it would mean that I would be getting
less profit, not only because I would have to pay more money but also
because the customers might be less attracted to my product and might
buy products from my rivals who will be selling similar products at
lower prices.

I think my margin of safety would be when I have sold about 850 of the
car this is because I will have made more than £10000 profit.



Task 7a Conclusion
======================================

I found out that if I priced my car at £50 each it would mean that I
would of made a loss, so I decided to price my car at £100 each.

The break-even shows me that I would have to sell 625 remote control
cars to make the minimum amount of profit. It also shows that my
business will be a success if I could sell all the cars, because
unlike the first chart I do not need to order a further 1000 cars. I
will be making £37500 profit by the end of the year. This means my
product will be a success.

I got all this data by looking at break-even charts. The results show
what would happen if I sell all my products, it is only an assumption
of what would happen. This is the problem with break-even charts it
only assumes the profit I will be making. If I knew the exact figures
of how much cars I would be able to sell this would make my
predictions much more accurate. The contingency plans a businesses
might take to avoid inaccurate break-even charts is to go around doing
research on how they will be able to sell, maybe conducting a
questionnaire. This would make their predictions a little more
accurate.

Task 7b

I might change the price of my remote control cars because of the
competition of the rival products. If they end up selling more cars
than I do I might be forced to lower my price of the remote control
cars, I might reduce it by 10 or 20 pounds.

I might change the manufacturer of the car and end up buying remote
control cars that differ greatly from the Subaru Impreza.

I might choose another model or choose another company such as Tyco
RC. I might choose to import models from other countries because it
would work out to be cheaper.
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