Fitzroy Court
Introduction
Universal Marketing PLC are owners of new apartment and leisure complex named Fitzroy Court which situated in West Country in England. Universal Marketing plans to carry-out research to determine the best pricing strategy for Fitzroy Court for its holiday apartments. In order to carry the market research Universal Marketing PLC must identify [1]. Break-even points for the upper and lower selling prices for each type of apartment per week [2]. Expected net profit per week for each apartment type, at the upper and lower proposed selling prices and [3]. Recommendations as to how the cost data should be used in setting prices.
Breakeven Point for Fitzroy Court
The breakeven point is the point at which sales are equal to expenses. In our case Fitzroy Court rents enough apartments to cover its expenses without making a loss or a profit. However, if Fitzroy Courts rents above the breakeven, then it makes a profit. Whereas, if it sells less; a loss is incurred.
To compute the breakeven for Fitzroy Court we must obtain the fixed cost, variable cost and the rent prices. The formulae used to calculate breakeven
Breakeven Point in Units = Fixed Costs/Price – Variable Costs
| Calculation of Break-even Point | ||||||
| Studio | ||||||
| Lower Break-even point | Upper Break-even Point | |||||
| Fixed Cost | 55.6× 18 = | 1000.8 | Fixed Cost | 55.6× 18 = | 1000.8 | |
| Unit Selling Cost | 240 | Unit Selling Cost | 300 | |||
| Variable Cost | £20.80 | Variable Cost | £20.80 | |||
| 1000.8/ | 240-20.8 | 1000.8/ | 300-20.8 | |||
| Break-even Point | £4.57 | Break-even Point | £3.58 | |||
| One- Bedroom | ||||||
| Lower Break-even point | Upper Break-even Point | |||||
| Fixed Cost | 55.6× 216 = | 12009.6 | Fixed Cost | 55.6× 216 = | 12009.6 | |
| Unit Selling Cost | 320 | Unit Selling Cost | 420 | |||
| Variable Cost | 26.8 | Variable Cost | 26.8 | |||
| 12009.6/ | 320-26.8 | 12009.6/ | 420-26.8 | |||
| Break-even Point | £40.96 | Break-even Point | £30.54 | |||
| Two-Bedroom | ||||||
| Lower Break-even point | Upper Break-even Point | |||||
| Fixed Cost | 55.6× 60 = | 3336 | Fixed Cost | 55.6× 60 = | 3336 | |
| Unit Selling Cost | 350 | Unit Selling Cost | 480 | |||
| Variable Cost | 47.8 | Variable Cost | 47.8 | |||
| 3336/ | 350-47.8 | 3336/ | 480-47.8 | |||
| Break-even Point | £11.04 | Break-even Point | £7.718 | |||
Breakeven Analysis
The Fitzroy Court has a lower break even point of 4.98 units while a higher one at 3.58 units for the studio; this means that Fitzroy Court will have to rent units of the studio within this range so as to break even. It is at this point that the company will be able to acquire all the costs associated with creating the product. Any units sold above will bring about profit. On the other hand, the one bed room has a lower break even point of 40.96 and a higher break even point of 30.58. Lastly the two bed room apartment has a lower break even point of 11.04 and a higher break even point of 7.718.
The studio has a higher break even point of 28% on the upper point (4.96/18 * 100) and 20% (3.85/18 * 100) on the lower point while for the one bed room it has a lower break even point of 19% (40.96/216 * 100) on the lower level and 14% (30.54/216 * 100) on the higher level and for the two bed room it is much lower with 18.4% (11.04/60 * 100) on the lower level and 13% (7.718/60 * 100) on the higher point. Generally Fitzroy Court has to a higher break even point on the Studio it has to increase the prices so as to reduce the break even point.
Net Profit
Net Profit is the measure of profitability of an activity after taking into consideration all of the cost. It is acquired by subtracting the sales revenue to the total cost. It is vital in the calculation of the profitability of a company.
| Calculation of Net Profit | ||||||
| Studio | ||||||
| Lower | Higher | |||||
| Selling Cost | 240 × 6 = | 1440 | Selling Cost | 300 × 6 = | 1800 | |
| Fixed Cost | 1000.8 | Fixed Cost | 1000.8 | |||
| Variable Cost | 20.8 | Variable Cost | 20.8 | |||
| 1440 – 1021.6 | 1800 – 1021.6 | |||||
| Net Profit | 418.4 | Net Profit | 778.4 | |||
| One Bed-room | ||||||
| Lower | Higher | |||||
| Selling Cost | 320 × 54 = | 17280 | Selling Cost | 420 × 54 = | 22680 | |
| Fixed Cost | 12009.6 | Fixed Cost | 12009.6 | |||
| Variable Cost | 26.8 | Variable Cost | 26.8 | |||
| 17280 – 12036.4 | 22680 – 12036.4 | |||||
| Net Profit | 5243.6 | Net Profit | 10643.6 | |||
| Two Bed-room | ||||||
| Lower | Higher | |||||
| Selling Cost | 350 × 10 | 3500 | Selling Cost | 480 × 10 | 4800 | |
| Fixed Cost | 3336 | Fixed Cost | 3336 | |||
| Variable Cost | 47.8 | Variable Cost | 47.8 | |||
| 3500 – 3383.8 | 4800 – 3383.8 | |||||
| Net Profit | 116.2 | Net Profit | 1416.2 | |||
Net Profit Analysis
The studio has a net profit of 418.4 (23%) on the lower level and 778.4 (43%) on the higher level. The one bed room has a net profit of 5243.6 (24%) on the lower level and a net profit 10,643.6 (49%) on the higher level, while the two bed room has a net profit of 116.2 (2%) on the lower level and 1416.2 (24%) on the higher level. The one bed room has a higher net profit when compared to the other apartments.
Recommendation
The best price is the one that acquires the most profit. In the Fitzroy Court, the maximum amount of profit would be acquired when a higher price is set in the higher season. This is since in the higher season the numbers of people visiting and using the rooms are many and would fill the rooms. Hence maximum profit would be acquired (Varian, 1992). On the other hand, the lower season similarly has to be considered and the benefits have to be acquired. This will be done if cheaper price are set as higher prices will attract no clients. The Court will hence acquire benefits in both seasons.
Conclusion
Breakeven point analysis has been applied to know the point at which an intended profit would be acquired. The analysis has focused on the studio, one and two bedroomed apartments with varied benefits in them. The breakeven point is set with the objective of the company in focus.
Bibliography
Varian, H. (1992) Microeconomic Analysis, Third edition, New York: Norton, Section 8.7
