Price Improvement

And finance Allah Shmoop How do you find volume based

break even point or margins in C v P Or

like in plain English Where do you break even Like

at what volume of your products Can you pay your

rent insurance overhead salary and have just enough left over

to pay the interest on the loan that grandmama gave

you to start this embalming company So yeah that's what

you dio You're an embalmer And here's your embalmer jacket

for a thousand bucks you stick bodies on this old

sewing machine like thing and spin Well it's basically masking

tape around them and then dip them in this woo

magic fluid No don't look there It's not the secret

sauce from Jack in the box and boom They're ready

to be you know put on display Well why do

people embalm They like the spirituality of it You know

you do a little ceremony Kind of like the twelfth

century Viking meets the eighteenth century into it with a

dash of for millennia ago Egypt thrown in Your parents

pushed you to have a steady job maybe go to

law school Something you could really count on once your

rock and roll career died So you know death and

taxes and whatever And you were really never very good

with numbers not a big fan of paying taxes in

the first place s So here you are You don't

make much so you don't pay much in taxes anyway

A customer buying the basic embalming package pays you a

grand Sometimes it's walk in business Sometimes it's families with

the you know wheel in business And other times you're

just in upgrade to a funeral package Thanks in a

big shot out there to Bob's Holy Roller House of

Heaven in furniture shop lifesavers Well you outsource most of

the work piecemeal to Luke Risha Here she charges you

two hundred bucks for a full wrap old school The

masking tape costs another eighty bucks and the secret saw

the magic after life fluidity elixir of blah blah blah

or whatever you're calling in this week's special Yeah you've

got to find the newspaper coupon section for the name

but anyway a gallon of that It's of costs one

hundred bucks So that's your marginal world You charge a

grand for costs of two hundred for labor Eighty for

the tape one hundred for the goop and that's it

Three eighty and costs six hundred twenty dollars in contribution

for unit or unit sale The only problem Phil You

have to refrigerate the clients sometimes for a long time

until you can all schedule the afterlife party And there's

always a relative stuck in some meeting or on a

trip or something So you spend five grand a month

on rent and then another two grand on electricity and

maintenance and all the other storage things And yeah it's

kind of nice to not have to carry life insurance

anyway Steady state You basically have seven grand to make

up in volume every month to just break even from

your operations So how many customers buying the basic thousand

dollar package do you need Well each customer contributes six

hundred twenty bucks So thinking aloud here if you had

ten of them well that had contribute sixty two hundred

to go again through seven grand and fixed recurring costs

Right That would get you close Oh the actual number

Well you just divide seven thousand by six Twenty there

The revenues by the unit contribution of profits and you

get eleven point two So really you need a dozen

customers a month to break even on this plan Because

you have other expense like a phone line And you

of course need a little bit extra for you know

accidents or whatever Although you're thinking well like what worse

could happen here But it's amazing what goes on here

at night You had a family of rats break in

one time in the after life Elixir of Love was

well a few days ripe And oh it wasn't pretty

So the Elixir has a formula and it's not just

mayo ketchup in a dash of Worcestershire Sure sure Shire

It's way more than that But this calculation has a

formula too There are a few of them in fact

and for context You're thinking about opening a chain of

these places all around the country and the world You

get cheaper prices on tape and elixir at volume and

maybe you'll find someone needing less maintenance than Lou Krysia

you know for less than two hundred bucks per Anyway

you confined the break even on volume here right You

need twelve bodies at a grand each or twelve grand

total to get there So to calculate you took your

fixed recurring costs of the five grand in Ran into

grand Electric and other veils Seven grand total and you

divided it by the unit contribution of six hundred twenty

dollars And that's how you got the eleven point to

when we rounded up a body Because well of course

you can't have a fraction of a body The formula

break even volume in units equals fixed recurring costs over

unit contribution Or if you had the contribution margin i

e The profit margin of your units sale fell You

could get the answer Here is well that is the

contribution margin here is six hundred twenty overthe ao or

sixty two percent nice high margin business So to get

the break even volume you need on a sales dollars

basis while you just divide that seven grand figure you're

fixed recurring overhead by the contribution margin figure and voila

you get the same number Yes Third grade arithmetic Magic

So aboutthe loan to start this thing from Grandmama Well

she's off to a better place now and yeah that's

her here You still have to pay off that loan

and you want to make enough profit so you can

go build another hundred of these stores and really make

something of this life of yours or the next either

is fine but you need to get started before you

run out of time So you've set a target profit

number for this store for the months going forward of

four grand big up profit numbers But you also got

a lot of free press from the you know rat

incident What they say There's no such thing as bad

press So you're expecting a lot of customers coming in

and you already have a load of reservations And you're

optimistic about your new partnerships with the US Hang Gliding

Association and the Grand Canyon Motorcycle Jumping Association and the

Harness List Climbers Association So your target is four grand

a month in profit Well how do you get there

Well you can think of a need for profit almost

like it's just more overhead So today you have five

grand in rent in two grand in utilities costs and

everything else for seven grand So you've been thinking of

yourself as an absentee owner and haven't been taking a

really salary and you should someday But for now what

Grandmama left you is tidying things They're covering thing things

are paying the basics in your life anyway that seven

grand and fix recurring overhead Then you want four grand

a month in profits So you think you're a big

line here as being eleven grand So what's your target

volume then you know like at a grand a pop

or a mom or uncle or aunt How many sales

do you need in a month to hit your target

profit of four thousand dollars So that's seven thousand fix

recurring plus the four thousand of profit target That's eleven

thousand bucks divided by the six hundred twenty dollars of

contribution per customer And that gets you seventeen point seven

It will round up to eighteen bodies a month All

right not that bad A goal that's almost like one

a day you know like the vitamin which well this

really pale guy clearly never took a body A week

day Yeah totally doable is a goal And your target

sales volume Well take the eleven grand divided by the

contribution margin of point six two and you have seventeen

point seven there OK right so same calculation Mohr less

just flipping around a few numbers So where do things

get ugly here or uh well uglier What if you

could raise prices with no diminishing of volumes like Could

you charge fifteen hundred or two grand for a eternal

life likeness and bliss Or what if things went the

other way How sensitive is your pricing or set in

a very macro micro we can kind of way How

steep is your demand Curves like Could you charge eight

hundred dollars and get way more customers And here's another

thought What if your costs went down with scale like

if you had ten shops could you get masking tape

at half the price you're paying Would labor go up

or down Is Lacresha a kind of one time gift

Or is she making way more than what really market

prices are for what you'd have to pay in the

future to get Mohr embalmers is therein embalmers union Yeah

Preserve our jobs or we won't preserve anything Or I'd

like to lodge a formaldehyde complaint like those signs Do

it well if you make more money the bigger you

get that it be called operating leverage That is you'd

have operating leverage if you made more profits The bigger

you got so yes Yes There's the thinker so much

Think about so little Actually maybe you have tons of 00:08:08.212 --> [endTime] time to think about it