$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-1This weekBreak-Even AnalysisBootstrappingLeverageStart-up costsForecasting$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-2Case StudyNew nae ! pro "ora cash "low is calle# cash $u#getStart-up ! all the e%penses $e"ore you open the #oor&'ut in separate colun ! #e#uct "ro initial cash"low to start $eginning $alanceLine o" cre#it is pay$ack interest only ! pri plus (&25)12$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-*Learning Objective+eview "i%e# an# varia$le costs,n#erstan# $reakeven analysis an# its uses,n#erstan# pro"it an# $reak even-hat is operating leverageThe ipact o" sales on"i%e# costs an# varia$le costs $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-.Review/ostsFi%e#/osts0aria$le /osts$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-52-5All costs associate# with pro#ucing or procuring a pro#uct or service that is sol# $y a "ir an# are #irectly relate# to sales&As volue increases1 total varia$le costs increase/23SFor 4anu"acturer or 'rovi#er o" Service/overs aterials1 la$or an# "actory overhea# applie# #irectly to pro#uctionFor +eseller 5-holesaler or +etailer6/overs priarily the cost o" erchan#iseSales coissions an# #elivery e%penses0aria$le /osts are7$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-8A cost that #oes not change with the aount o" goo#s or services pro#uce#& Fi%e# costs are e%penses that have to $e pai# $y a copany1 in#epen#ent o" any $usiness activity& Fi%e# /osts$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-9/oitte# /osts/osts re:uire# to aintain the organi;ationE%aples inclu#e non-arketing e%pen#itures1 such as0/ is varia$le cost per unitCesire# pro"it with $reak-even analysis in #ollars&0/ - 'pro"it Cesire# F/:uantityTotal+= )'6 50 - 1pro"it Cesire#?+=FCBE$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-22)rofit and !rea"#$ven0/ - 'pro"it Cesire# F/:uantityTotal+=-e want to earn ?1@1@@@ on this unitFi%e# cost are ?1@@1@@'rice per unit is ?2@@0aria$le cost is ?1@@-hat is the :uantity $reak even an# the revenue $reak even pointB )'6 50 - 1pro"it Cesire#?+=FCBE$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-2*)rofit and !rea"#$ven0/ - 'pro"it Cesire# F/:uantityTotal+=-e want to earn ?1@1@@@ on this unitFi%e# cost are ?1@@1@@'rice per unit is ?2@@0aria$le cost is ?1@@-hat is the :uantity $reak even an# the revenue $reak even pointB )'6 50 - 1pro"it Cesire#?+=FCBEBE' A ?1@@1@@@ G ?1@1@@@A 1111@ units?2@@ - ?1@@BE'?1@@1@@@ G ?1@1@@@A ?22@1@@@1 ! 5?1@@)?2@@6$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-2.The SithIs are thinking o" launching a new pro#uct in their store& Fi%e# cost to $e allocate# to the #epartent are estiate# at ?151@@@Sales e%pectations are 1@1@@@ units $ase# on a arket stu#y0aria$le costs are ?2@1@@@,nit selling price is ?.&5@-hat is the $reak even point in unitsB +evenueBShoul# they #o itBPVCFCBE=1? VC - PFCBEQ=$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-25The SithIs are thinking o" launching a new pro#uct in their store& Fi%e# cost to $e allocate# to the #epartent are estiate# at ?151@@@Sales e%pectations are 1@1@@@ units $ase# on a arket stu#y0aria$le costs are ?2@1@@@,nit selling price is ?.&5@-hat is the $reak even point in unitsB +evenueBShoul# they #o itBPVCFCBE=1? VC - PFCBEQ=$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-283oo# i#ea ! $reak even 81@@@ units e%pecte# sales 1@1@@@2" course woul# have to $e copare# to what is currently sol# in the space$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-292n the sur"ace1 $reak-even analysis is a tool to calculate at which sales volue the varia$le an# "i%e# costs o" pro#ucing your pro#uct will $e recovere#& Another way to look at it is that the $reak-even point is the point at which your pro#uct stops costing you oney to pro#uce an# sell1 an# starts to generate a pro"it "or your copany& Dou can also use $reak even analysis to solve anagerial pro$les< setting price levels targeting optial varia$le) "i%e# cost co$inations #eterining the "inancial attractiveness o" #i""erent strategic options "or your copany!rea" $ven %nalysis$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-2=STA+T-,'S A+E TD'F/ALLD /ASJ '22+The average sall $usiness start-up kicks o"" with ?*@K or less in capital 52@@( Ewing 4arion Kau""an Foun#ation6/opanies launche# with ?1@K or less in initial capital ha# alost the sae e#ian growth rate as those with a$un#ant capital 52@@2 Fnc 5@@ Survey6Like it or not1 $ootstrapping is an essential skill set "or entrepreneursEFo% School o" Business - Teple ,niversity$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-2(-JAT TJE JE/K FS B22TST+A''FN3B,sing a variety o" techni:ues to strategically a%ii;e the ipact o" the ventureIs availa$le cash ,sing creativity an# ingenuity to launch an# grow a $usiness with "ew availa$le resourcesStarting a $usiness without an in"usion o" cash 2+ a%ii;ing the ipact o" "un#ing investe# $y the entrepreneur or others ANC continuously optii;ing cash "low an# preserving capital Living the antraFnnovation >Fncu$ators ! re#uce# rent on o""ice space an# assistance ! Kaloops Fnnovation>2N EF an# starting a $usiness$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-5*FFNAL -2+CSDou ust have a $usiness plan+ecogni;e the #i""erence $etween NwantsO an# Nnee#sO)!n*" (!!"s"ra+ "! "he +!in" !$ s"ran#lin# #r!,"hEliinate all unnecessary costs1 inii;e necessary ones an# a%ii;e ipact o" availa$le cashLook "or a##itional revenue streas to increase reaching N$reakevenO an# "un# organicallyConIt :uit your #ay Po$3et out o" #e$t $e"ore launching a new enterpriseTreat every #ollar like it was your own personal oney$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-5.For new copanies Pust starting out shoul# they go "or higher "i%e# costs or higher varia$le costsB Fi%e# costs vs 0aria$le ! start-up$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-55O'erating Leverage2perating leverage easures a "irUs "i%e# versus varia$le costs&The relationship $etween "i%e# costs an# varia$le costs&$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-58O'erating Leverage/opanies with high operating leverage can ake ore oney "ro each a##itional sale i" they #onUt have to in-rease -!s"s "! +r!.-e %!re sales/ 0hi#her $i1e -!s"s2/opanies with high operating leverage lose ore with each loss o" a##itional sale&Soeties goo# in"oration to know a$out your copetitorForecasting sales -i" overstate#can have $ig ipact in cash "low proPectionsF/0/Fn goo# tiesCo $etterBa# ties #o worseF/0/Fn goo# ties#o not ake as uchBa# ties #o $etter$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-59)rofitability # CostsC!%+any A C!%+any BSales 11@@@1@@@ 11@@@1@@@0aria$le /osts 9@@1@@@ =@@1@@@Fi%e# /osts 2@@1@@@ 1@@1@@@2perating 'ro"it 1@@1@@@ 1@@1@@@Sae pro"it ! i" revenue goes up who will have a higher pro"it i" revenue goes up 5@LBF" revenue goes #own 25LB$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-5=C!%+any A C!%+any BSales 115@@1@@@ 115@@1@@@0aria$le /osts 11@5@1@@@ 112@@1@@@Fi%e# /osts 2@@1@@@ 1@@1@@@2perating 'ro"it 25@1@@@ 2@@1@@@C!%+any A C!%+any BSales 95@1@@@ 95@1@@@0aria$le /osts 5251@@@ 8@@1@@@Fi%e# /osts 2@@1@@@ 1@@1@@@2perating 'ro"it 251@@@ 5@1@@@Fncrease +evenue Cecrease +evenue $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-5(+m'act of O'erating Leverage on )rofits

Fir AFir B Fir /Fir AFir B Fir /Sales ?1@ ?11?1(&5Operating CostsFi%e# 9 21. 0aria$le2 9*Operating Profit??11?2?2 ?2&5?2&55in thousan#s6 5in thousan#s6F" there was a 5@L increase in salesF" there was a 5@L increase in sales "or ne%t year1 which "ir #o you think will $e ore NsensitiveONsensitiveO to the change in sales 5i&e&1 show the largest percentage change in operating pro"it1 EBFT6B$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-8@+m'act of O'erating Leverage on )rofits

Fir FFir 0 Fir 2FFir FFir 0 Fir 2FSales ?15 ?18&5?2(&25Operating CostsFi%e# 9 21. 0aria$le * 1@&5.&5Operating Profit??55?. ?. ?1@&95?1@&95Operating Profit??11?2?2 ?2&5?2&5L/hange in EBFTL/hange in EBFTS.@@L1@@L **@L.@@L1@@L **@L5in thousan#s6 5in thousan#s6S 5EBFTt - EBFT t-16 ) EBFT t-1$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-81+m'act of O'erating Leverage on )rofits

Fir AFir B Fir /Fir AFir B Fir /Sales ?5 ?5&5?(&95Operating CostsFi%e# 9 21. 0aria$le 1 *&5 1&5Operating Profit??-*-*?@?@ ?-5&95?-5&95L/hange in EBFTL/hange in EBFTS-.@@L-1@@L -**@L-.@@L-1@@L -**@L5in thousan#s6 5in thousan#s6Operating Profit??11?2?2 ?2&5?2&5$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-82)e#ree !$ !+era"in# levera#e 0)OL2 is the percentage change in operating incoe #ivi#e# $y the percentage change in sales&O'erating LeverageC2L A L change in operating incoeL change in sales2perating incoe A Earnings Be"ore Fnterest an# Ta%es 5EBFT62perating incoe?2@@1@@@$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-8**egree of o'erating leverage 4*OL5C2L A L change in operating incoeL change in sales3445 3464Sales 9@2= =@@(/23S *925 ..@53ross 'ro"it5/ontri$ution 4argin6**@* *8@.E%penses 18=9 1(1*2perating Fncoe 1818 18(1$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-8.*egree of o'erating leverage 4*OL5C2L A L change in operating incoeL change in sales3445 3464Sales 9@2= =@@(/23S *925 ..@53ross 'ro"it5/ontri$ution 4argin6**@* *8@.E%penses 18=9 1(1*2perating Fncoe 1818 18(1C2L A 18(1-18181818 % 1@@ A .&8. A &** =@@(-9@2= 1*&(8 9@2= % 1@@ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 5-85So "or every 1L change in sales there is a correspon#ing increase or #ecrease in operating incoe o" &**Jigher C2L using ore operating leverageLower C2L 5lower "i%e# costs6 less operating leverageJigher C2L is the "ir that will $e ost NsensitiveO to a change in sales&*egree of o'erating leverage 4*OL5