For
what response rate does the company break even?
Using the following model:
|
Great
Threads direct mail model |
|
|
|
Range
names used:
|
|
|
||||
|
|
|
|
|
|
|
|
|
|||
|
Mailing
inputs |
|
|
Model
of responses |
|
|
|
|
|||
|
Fixed
cost of printing |
$20,000 |
|
Response
rate (trial value) |
8% |
|
|
|
|||
|
Variable
costs |
|
|
Number of
responses |
8000 |
|
|
|
|||
|
Printing |
$0.10 |
|
|
|
|
|
|
|||
|
Mailing,
buying names |
$0.15 |
|
Model
of revenue, costs, and profit |
|
|
|
||||
|
Number
mailed |
100000 |
|
Revenue |
$320,000 |
|
|
|
|||
|
|
|
|
Costs |
|
|
|
|
|||
|
Order
inputs |
|
|
Fixed |
$20,000 |
|
|
|
|||
|
Average
order |
$40 |
|
Variable
from mailing |
$25,000 |
|
|
|
|||
|
Variable
cost (% of order) |
80% |
|
Variable
from orders |
$257,600 |
|
|
|
|||
|
Variable
cost of envelopes |
$0.20 |
|
Total
cost |
$302,600 |
|
|
|
|||
|
|
|
|
Profit |
$17,400 |
|
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Response rate |
Profit |
|
|
|
|
|
|
|||
|
|
$17,400 |
|
|
|
|
|
|
|||
|
1% |
-$37,200 |
|
|
|
|
|
|
|||
|
2% |
-$29,400 |
|
|
|
|
|
|
|||
|
3% |
-$21,600 |
|
|
|
|
|
|
|||
|
4% |
-$13,800 |
|
|
|
|
|
|
|||
|
5% |
-$6,000 |
|
|
|
|
|
|
|||
|
6% |
$1,800 |
|
|
|
|
|
|
|||
|
7% |
$9,600 |
|
|
|
|
|
|
|||
|
8% |
$17,400 |
|
|
|
|
|
|
|||
|
9% |
$25,200 |
|
|
|
|
|
|
|||
|
10% |
$33,000 |
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|||
It is clear
that the breakeven point is between 5% and 6%.
To find the exact breakeven one can use Excel’s Goal Seek.
After
choosing Tools/Goal Seek, by filling in the prompt as follows:
The
following results occur:
|
Model
of responses |
|
|
Response
rate (trial value) |
5.77% |
|
Number of
responses |
5769 |
|
|
|
|
Model
of revenue, costs, and profit |
|
|
Revenue |
$230,769 |
|
Costs |
|
|
Fixed |
$20,000 |
|
Variable
from mailing |
$25,000 |
|
Variable
from orders |
$185,769 |
|
Total
cost |
$230,769 |
|
Profit |
$0 |
With profit
set at 0, a Response Rate of 5.77%, totaling 5769, would be required to breakeven.